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Assume that a company expects to produce 11,200, 12,200, and 14,200 units of finished goods in January, February, and March, respectively
Assume that a company expects to produce 11,200, 12,200, and 14,200 units of finished goods in January, February, and March, respectively. Each unit of finished goods requires 4 pounds of raw material and each pound of raw material costs $4.00. The company always maintains an ending raw materials inventory equal to 30% of next month’s production needs. What is the amount of expected raw materials purchases for February?
Multiple Choice
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$204,800
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$153,600
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$195,200
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$167,360
Expert Solution
| Purchase Budget for February | |
| Production units | 12,200 |
| Pounds per unit | 4 |
| Total pounds needed for production | 48,800 |
| Ending raw materials inventory | 17,040 |
| Total raw materials inventory needed | 65,840 |
| Beginning raw materials inventory | -14,640 |
| Purchases pounds | 51,200 |
| Cost per pound | $4 |
| Cost of purchases | $204,800 |
Raw materials purchases for February = $204,800
First option is correct.
Working:
Ending raw materials for January = Total pounds needed for production in February x 30%
= 48,800 x 30%
= 14,640
Ending raw materials inventory for January will be the beginning raw materials inventory for February.
March production = 14,200 units
Pounds needed for production in March = 14,200 x 4
= 56,800
Ending raw materials inventory for February = Pounds needed for production in March x 30%
= 56,800 x 30%
= 17,040
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