ABC Company Production Budget For The Month

Abc Company Has The Following Production Budget For The Months Of Janu

Abc Company has the following production budget for the months of January through April of 2012: January 25,000 units, February 30,000 units, March 40,000 units, April 20,000 units. Each unit of finished product requires 5 pounds of raw material costing $2 per pound. The desired ending inventory each month is 40% of the next month’s requirement of raw material. In December 2011, the ending inventory of raw material was 10,000 pounds. The task is to prepare a raw materials purchase budget for the first quarter.

Additionally, James Industries is evaluating whether to continue manufacturing a component internally or purchase it from an outside supplier. The cost to manufacture one component is $200, calculated based on direct materials, direct labor, variable and fixed manufacturing overheads. The company uses 4,000 components annually. A bid of $80 per component has been submitted by Light, Inc., prompting considerations of whether to buy or make. If purchased, James could lease their unused production facilities for $50,000 per year. The decision requires analyzing whether the company should make or buy the component and determining the total dollar difference between these options.

Paper For Above instruction

The decision-making process in manufacturing companies often involves detailed budget preparations, particularly for raw materials, and cost-benefit analyses to determine whether to produce internally or purchase from external suppliers. This paper provides a comprehensive analysis of both scenarios: preparing a raw materials purchase budget for ABC Company for the first quarter of 2012, and evaluating the make-or-buy decision faced by James Industries regarding a specific component.

Raw Materials Purchase Budget for ABC Company

The raw materials purchase budget is essential for ensuring sufficient raw materials are available to meet production demands while managing inventory levels efficiently. For ABC Company, the primary considerations include the production schedule, raw material requirements per unit, costs, and desired ending inventory levels.

The production forecast for January to April 2012 is 25,000, 30,000, 40,000, and 20,000 units respectively. Each unit requires 5 pounds of raw material at a cost of $2 per pound. The company aims to maintain an ending inventory equal to 40% of the subsequent month’s raw material requirement, with December 2011 ending inventory standing at 10,000 pounds.

Calculation of Raw Material Requirements

The raw material needed for each month is calculated by multiplying the number of units to be produced by the raw materials per unit:

• January: 25,000 units × 5 pounds = 125,000 pounds
• February: 30,000 units × 5 pounds = 150,000 pounds
• March: 40,000 units × 5 pounds = 200,000 pounds
• April: 20,000 units × 5 pounds = 100,000 pounds

The desired ending inventory for each month is 40% of the following month’s raw material requirement:

• January: 150,000 × 40% = 60,000 pounds
• February: 200,000 × 40% = 80,000 pounds
• March: 100,000 × 40% = 40,000 pounds

The beginning inventory for January is given as 10,000 pounds.

Calculating Raw Materials to be Purchased

The formula for raw materials to be purchased each month is:

Materials Needed for Production + Desired Ending Inventory – Beginning Inventory

Applying this:

• January: (125,000 + 60,000) – 10,000 = 175,000 pounds
• February: (150,000 + 80,000) – 60,000 = 170,000 pounds
• March: (200,000 + 40,000) – 80,000 = 160,000 pounds

The cost of purchasing raw materials each month is obtained by multiplying the pounds to be purchased by the cost per pound:

• January: 175,000 × $2 = $350,000
• February: 170,000 × $2 = $340,000
• March: 160,000 × $2 = $320,000

Thus, the total raw material purchase budget for the first quarter sums to $1,010,000, facilitating proper planning and procurement to meet production needs without excess inventory buildup.

Make-or-Buy Decision for James Industries

James Industries faces a strategic decision: whether to manufacture a component internally at a cost of $200 per component or to purchase it from Light, Inc. at a bid price of $80 per component. This calculation involves reviewing costs associated with manufacturing versus purchasing, considering the impact on capacity utilization, and evaluating potential benefits from alternative use of the production facilities.

Cost Analysis of Manufacturing

The manufacturing cost per component is delineated as follows:

• Direct materials: $100
• Direct labor: $50
• Variable manufacturing overhead: $30
• Fixed manufacturing overhead (allocated): $20

Total manufacturing cost per component sums up to $200. For the annual production of 4,000 components, the total manufacturing expense is $800,000.

Cost of Purchasing

The bid from Light, Inc. proposes a purchase price of $80 per component, amounting to $320,000 annually for 4,000 components.

Additional Considerations

If the company opts to buy the components instead of manufacturing, it could lease out their unused facilities for $50,000 per year, adding a financial benefit to buying. Conversely, manufacturing internally involves costs that could be avoided if the component is purchased externally.

Decision-Making Analysis

To determine whether to make or buy, the total relevant costs associated with each option are compared:

• Make: $800,000 (total manufacturing costs)
• Buy: $320,000 (purchase price) + $50,000 (lease income) = $370,000

The difference between manufacturing and procurement costs is:

Manufacture ($800,000) – Purchase ($370,000) = $430,000

This indicates that purchasing the components from Light, Inc. yields a significant cost saving of $430,000 per year compared to manufacturing internally.

Conclusion

Based on the cost analysis, James Industries should opt to buy the component from Light, Inc., as it results in substantial cost savings and allows the company to leverage idle capacities for leasing income. Such strategic outsourcing aligns with cost efficiency and operational flexibility objectives.

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