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A company anticipates that 10000 units of product z will be sold during January. Each unit of Z requires 2 litres of raw material w. Actual stocks as of 1 January and budgeted inventories as of 31 January are as follows.
1 January 31 January
Product z (units) 14000 12000
Raw material w (litres) 20000 15000
1 litre of w costs $4
If the company pays for all purchases in the month of acquisition, what is the cash outlay for January purchases of w?
ans) 44000 ( I don’t get this what’s that mean each unit of z requires 2 litres of raw material w)Suppose that the product is butter. Butter needs milk to make it (so milk is the raw material being used), so maybe for 1 unit (i.e. 1 pack) of butter needs 2 litres of milk.
In this question, given that they expect to sell 10,000 units they need to produce 10,000 + 12,000 – 14,000 = 8,000 units.
That means that they need 8,000 x 2 = 16,000 litres of the raw material.
Because of the inventories they therefore need to buy 16,000 + 15,000 – 20,000 = 11,000 litres.
Therefore they will need to spend 11,000 x $4 = $44,000.
Have you watched my free lectures on budgeting, because this example is very similar to the example that I work through in my lecture?
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