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Question) A company purchased a chemical then refines it for resale. Budget sales of the refined chemical are as follows:
Sales in liters October November December
4,000 5,000 3,000Note that:
• The basic unrefined chemical costs $2 per liter.
• Losses are 20% of the finished output of refined chemical.
• The target month-end stock of unrefined chemical is 30% of the chemical required for next month’s budgeted production.
• The target month-end stock of refined chemical is 30% of next month’s budgeted sales.
The budgeted purchases of unrefined chemical for October are:
a) 4,330 liters.
b) 5,160 liters.
c) 5,196 liters.
d) 5,124 liters.The refined chemicals are the finished goods.
So the closing inventory at the end of each month is as follows:
end Sept 1,200 (30% x 4,000); end Oct: 1,500 (30% x 5,000); end Nov 900 (30% x 3,000)
So. the budgeted production in October is 4,000 – 1,200 + 1,500 = 4,300 litters
Budgeted production in November is 5,000 – 1,500 + 900 = 4,400 litresSo the unrefined chemical needed each month is October 5160 (4300 + 20%); and in November 5280 (4400 + 20%)
So, the closing inventory of unrefined chemical is: end September 1548 (30% x 5160); and end October 1584 (30% x 5280).
You should now have no problem calculating the purchases in October! (the correct answer is (c).
(I don’t know where you found this question, but presumably the book also gave the answers and workings? It would be better if you asked which part of the workings you did not understand rather than just setting me a question 🙂 )
Thank you dear John for the very prompt reply. Actually I am preparing for an exam and randomly choosing questions from F2 related topics. I was tried this question for sometime and lost myself and that is why I posted it to this forum. Please expect some more questions from me.
Thanks again, Shams
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