Question

Simpleton Shoes sold 22,000 units for a total of $990,000 in sales in the second quarter of 20x6. Simpleton budgets 26% of the unit sale price for direct materials costs. If Simpleton expects to increase sales by 5% each quarter, how much do they need to budget for direct materials in the first quarter of 20x7? Assume that Simpleton keeps a raw materials inventory for 10% of the next quarter’s sales in stock.

Answer 1

Raw material purchase for the first quearter of 2017: 299.462,54

Step-by-step explanation:

expected sale for second quarter 2016: 22,000 units at $990,000

They grow at 5% each quarter

We are asked for first quarter 2017 which is, three quarter ahead so:

990,000 x 1.05^3 = expected sales for Q1 2017 1,146,048.75

From this: 26% are direct material cost Q1 2017: 297.972,675‬

but, we already have in our inventory 10% so we need to purchase for:

297,972.675 x (1 - 10%) = 268.175,4075‬

Plus, a desired ending inventory for 10% of the cost of next quarter:

Q1 2017 x 1.05 = 2017 Q2 = 1.203.351,1875‬

Then we calculate the material cost:

1.203.351,1875‬ x 26% = 312.871,30875‬

And we calcualte the 10% of this:

31,287.130875

In total we need to purchase for:

for expected cost of Q1 2017: 268,175.4075

for desired ending inventory: 31,287.130875

Total purchase: 299.462,538375‬