| Posted: 09 Mar 2011 at 16:06 | IP Logged
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My question is why should we consider the Feb production requirement when we caculate the tire purchase? Doese it matter if this is quarterly or monthly budget? I am so confused.
Card Bicycle Co. has prepared production and raw materials budgets for next year. At the end of this year, the finished product inventory is expected to include 2,000 bicycles, and raw material inventory is expected to include 3,000 bicycle tires. Each finished bicycle requires two tires. The marketing department provided the following data from the sales budget for the first quarter:
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Expected bicycle sales (units) |
January |
February |
March |
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12,000 |
16,000 |
18,000 |
The company inventory policy is to have finished product inventory equal to 20% of the following month¡¯s sales requirements, and raw material equal to 10% of the following month¡¯s production requirements. In the January budget for raw materials, how many tires are expected to be purchased?
Answers
A: 24,200
B: 26,120
C: 26,600
D: 26,680
D: Answer D is correct because 26,680 tires should be purchased. This is calculated by first computing the number of bicycles budgeted to be produced in January, which is equal to January sales + Desired ending inventory (20% of February sales) ¨C Beginning inventory (2,000), or 13,200 [12,000 + (20% ¡Á 16,000) ¨C 2,000]. To calculate tire purchases we also need to calculate the February production requirements, which is equal to 16,400 [February sales (16,000) + Desired ending inventory (20% ¡Á 18,000) ¨C Beginning inventory (20% ¡Á 16,000)]. Then tire purchases for January can be calculated as January production (13,200 ¡Á 2) + Desired ending inventory (16,400 ¡Á 10% ¡Á 2) ¨C Beginning inventory (3,000), which is equal to 26,680.
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Topic: A BEC problem
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