Question

In year 1, a large domestic manufacturer produces all of its motors domestically and sells them internationally. the company's management team is in the process of developing its year 2 budget, and copper costs represent a significant line item in the budget. in year 1，the company spent $1,000,000 in purchasing 250,000 pounds of copper. economic data indicate that in year 1 copper costs had a price index of 120.0, and expectations are that the index will increase to 126.0 in year 2. management anticipates a 5 percent increase in copper usage for year 2. what amount represents the year 2 budget for copper purchases?

Answer 1

Copper purchases in year 2 will increase due to two factors:

1) inflation in the cost of copper

2) an increase in the actual usage of copper (i.e., quantity needed).

Cost in year 1 × Change in price index:

$1,000,000 × (126 ÷ 120) = $1,050,000

The second step is to adjust for increased demand:

$1,050,000 × 1.05 = $1,102,500