Question #2 – 20 marks
Pearl Products Limited of Sarnia, Ontario, manufactures and distributes toys throughout central
Canada. Three cubic centimetres (cc) of solvent H300 are required to manufacture each unit of
Supermix, one of the company’s products. The company expects to pay $0.25 per cc of H300 to
its suppliers. The company is now planning its raw materials needs for the third quarter, the
quarter in which peak sales of Supermix occur. To keep production and sales moving smoothly,
the company has the following inventory requirements:
a. The finished goods inventory on hand at the end of each month must be equal to 3,000 units Supermix
20% of next month’s sales. The finished goods inventory on June 30 is budgeted to be 10,000 units.
b. The raw materials inventory on hand at the end of each month must be equal to one-half of the
following month’s raw materials requirements. The raw materials inventory on June 30 is budgeted to be
54,000 cc of solvent H300.
c. The company maintains no goods in process inventories.
Estimated sales for July to December are as follows: Month
Budgeted Sales (units)
1. Prepare a production budget for Supermix for July to October.
2. Prepare a budget showing the quantity of solvent H300 to be purchased in July, August, and September,
and for the quarter in total.
3. Examine the production budget you prepared above. Why will the company produce more units than it
sells in July and August, and fewer units than it sells in September and October?