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Infinity manufactures and sells a single product. The estimated sales for next year are 10,000 units.
Information relating to opening and closing inventory are expected to be as follows:Opening inventory
Direct Material
2,000 kg
Finished Goods
1,150 unitsClosing inventory
Direct Material
4,000 kg
Finished Goods
2,550 units
The expected loss during the production process is 10%. The finished product reject rate is 5%. The direct material prices for Year 5 are expected to be 20% higher than the standard price. The standard direct material cost is $20 per kg. The direct material cost per unit produced is $36.What is the budgeted material purchases during the year?
The answer is 624000. Can you explain to me how to get this answer. Thank you!
Look at finished goods first.
If opening stock is 1150, closing is 2550 and 10,000 are to be sold, then ignoring the 5% rejects, the company would need to make 10,000 + 2550 – 1150 = 11400. However, now taking into account the 5% rejection, 11400 must represent 95% of units made. So, made units = 11400 ÷ 0.95 = 12,000.
Std cost per kg = 20 and std cost in each unit is 36. This implies each unit takes 1.8kg.
Ignoring the material losses, making 12000 units would take 12,000 x 1.8kg = 21 600. Now taking into account the material loss of 10% this must represent 90% of the material needed, so material use must be 21 600/0.9 = 24,000. If material inventories are also to rise from 2000 to 4000 then 26,000kg must be the purchase budget in kg.
In $ this would be 26,000 x 20 = $520,000 at the current price. If prices rise by 20%, the budget must be 520,000 x 1.2 = 624,000.
This is a difficult question!
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