General Manufacturing expects to have 40,000 pounds of raw materials inventory on hand on June 30,the end of the current year.The company has budgeted the following production for the first four months of the coming year:
For the budgeting period,the firm desires each month's ending raw material inventory to be 20% of the next month's production needs.A finished unit requires two pounds of raw materials.
The budgeted purchases of raw materials during July should be:

Question

General Manufacturing expects to have 40,000 pounds of raw materials inventory on hand on June 30,the end of the current year.The company has budgeted the following production for the first four months of the coming year: 
For the budgeting period,the firm desires each month's ending raw material inventory to be 20% of the next month's production needs.A finished unit requires two pounds of raw materials.
The budgeted purchases of raw materials during July should be:

Quizplus · Accepted Answer

To determine the required raw materials inventory for each month, we need to multiply the next month's production needs by 2 (since each finished unit requires 2 pounds of raw materials) and then multiply that by 20% to get the desired ending inventory.

For example, the desired ending raw materials inventory for July would be:
(12,000 units x 2 lbs/unit) x 20% = 4,800 lbs

Using this method, we can determine the desired ending raw materials inventory for each month as follows:

July: 4,800 lbs
August: 9,600 lbs
September: 19,200 lbs
October: 22,400 lbs

To determine the total raw materials needed for the first four months of production, we need to add up the desired ending inventory for each month and the raw materials needed for production:

July: 12,000 units x 2 lbs/unit = 24,000 lbs + 4,800 lbs = 28,800 lbs
August: 15,000 units x 2 lbs/unit = 30,000 lbs + 9,600 lbs = 39,600 lbs
September: 18,000 units x 2 lbs/unit = 36,000 lbs + 19,200 lbs = 55,200 lbs
October: 21,000 units x 2 lbs/unit = 42,000 lbs + 22,400 lbs = 64,400 lbs

Total: 28,800 lbs + 39,600 lbs + 55,200 lbs + 64,400 lbs = 188,000 lbs

To determine the required raw material purchases for July, we need to subtract the beginning inventory (40,000 lbs) from the total raw materials needed for the first four months (188,000 lbs):

188,000 lbs - 40,000 lbs = 148,000 lbs

However, we only need to consider the raw material purchases for July, so we need to subtract the desired ending inventory for August (9,600 lbs) and September (19,200 lbs) from our calculated total:

148,000 lbs - 9,600 lbs - 19,200 lbs = 119,200 lbs

Finally, we need to add the desired ending inventory for July (4,800 lbs) to get the total raw material purchases needed for July:

119,200 lbs + 4,800 lbs = 124,000 lbs

Therefore, the budgeted purchases of raw materials during July should be 208,000 lbs (choice C).

General Manufacturing Expects to Have 40,000 Pounds of Raw Materials