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One pound of material is required for each finished unit. The inventory of materials at the end of each month should equal 20% of the following month's production needs. At the beginning of Month 1, 3,200 lbs. of materials were on hand. Purchases of raw materials for Month 2 would be budgeted to be: a. 17,600 pounds b. 23,400 pounds c. 20,600 pounds d. 25,000 pounds

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Answer: c. 20,600 pounds

Explanation:

For Month 1, the company would like to end the month with 20% of Month 2's production needs.

That translates to,

= 0.2 (22,000)

= $4,400 pounds.

This is what they want to start the month with. pounds.

They will need a total of 22,000 but since they started with 4,400 they will only need,

= 22,000 - 4,400

= 17,600 pounds

In addition though, the company wants to end Month 2 with 20% of Month 3. Months 3's amount is 15,000 pounds so,

= 0.2 (15,000)

= 3000 pounds.

They will need to purchase this figure in ADDITION to what they require for month 2 so we have,

= 17,600 + 3,000

= 20,600

20,600 pounds of raw materials need to be budgeted for.

The Purchases of raw materials for Month 2 would be budgeted to be option c. 20,600 pounds.

Calculation of the purchase of raw materials:

Since

There is 20% of production needs that mean

= 0.2 (22,000)

= $4,400 pounds.

Now the remaining should be

= 22,000 - 4,400

= 17,600 pounds

Now 20% of 15,000 should be 3,000 pounds

So, the purchase should be

= 17,600 + 3,000

= 20,600

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