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A company manufactures a single product. Budgeted production for the first three months of next year is as follows:
M1 – 8000 units
M2 – 9000 units
M3 – 7000 unitsEach unit uses 4kg of raw material costing £5/kg. The budgeted raw material inv. at the end of each month is to be 20% of the following months production.
What are the budgeted raw material purchases for month 2 of the next year (in £)?
I know the trick lies in this phrase: “The budgeted raw material inv. at the end of each month is to be 20% of the following months production”. No matter how I played with the figures I couldn’t get the answer.
Thank you very much in advance
Well, after first month it has to be left 9000*20%=1800 units.
Plus 9000 units produced for month number 2.
And after second month we need 20%*7000=1400 units for month #3.
That gives us 1800+9000-1400=9400 units, which is 9400*4kg*5$=188000$.Your 1st line:
“Well, after first month it has to be left 9000*20%=1800 units”
Why do you take 20% from 9000 which is the figure for month 2 and you are not taking 20% from month 1 (8000 units)?
I can kind of see your logic but when I’ve read the questions I assumed that e.g. we need to take 20% from month 1 and add it to month 2 if it makes sense…
Coz it says “inv. at the end of each month is to be 20% of the following months production.”
So for the month 1 we have to take 20% of the following month (second).Michael’s answer is correct (even though he is answering in the Ask the Tutor forum instead of the normal forum 🙂 )
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