Production Purchases Cash Disbursement So Sweet Has Budgeted

Production Purchases Cash Disbursement So Sweet Has Budgeted Sale

Production; purchases; cash disbursement So Sweet! has budgeted sales of 600,000 cans of diet iced tea mix during June 2010 and 750,000 cans during July. Production of the mix requires 14.5 ounces of tea and 1.5 ounces of sugar substitute. June 1 inventories of tea and sugar substitute are as follows: Iced tea mix — 24,600 cans of finished product; Tea — 750 pounds; Sugar substitute — 200 pounds. So Sweet! generally carries a finished goods inventory equal to 5 percent of the following month’s needs; raw material ending inventories should equal 10 percent of Finished Goods Inventory. Assuming that the ending inventory policy is met, answer the following questions.

a. How many cans of iced tea mix will be produced in June?

b. How many pounds of tea will be purchased in June?

c. How many pounds of sugar substitute will be purchased in June?

d. Tea and sugar substitute cost $3.50 and $0.40 per pound, respectively. What dollar amount of raw material purchases is budgeted for June?

e. If the company normally pays for 40 percent of its budgeted purchases during the month of purchase and takes a 2 percent discount, what are budgeted cash disbursements in June for June purchases? How much will So Sweet! Owe for June purchases in July?

Paper For Above instruction

The budgeting process for production and raw materials is critical for managing inventory levels, cash flow, and overall operational efficiency. For So Sweet!, understanding the relationship between projected sales, production needs, and inventory policies allows for precise planning of raw material purchases and cash disbursements. This paper addresses each specified question in turn, providing detailed calculations and rationale based on standard budgeting principles and inventory management practices.

a. How many cans of iced tea mix will be produced in June?

To determine the production volume for June, we need to consider the projected sales, desired ending inventory, and beginning inventory. The forecasted sales for June are 600,000 cans, with a beginning finished goods inventory of 24,600 cans. Since So Sweet! maintains ending inventory equal to 5% of the following month’s sales (i.e., July’s sales of 750,000 cans), the desired ending inventory for June is 5% of 750,000, which equals 37,500 cans.

Using the inventory formula:

• Opening Finished Goods Inventory: 24,600 cans
• Desired Ending Inventory: 37,500 cans
• Projected Sales for June: 600,000 cans

Production required = Sales + Ending Inventory – Beginning Inventory = 600,000 + 37,500 – 24,600 = 612,900 cans.

Therefore, So Sweet! will produce approximately 612,900 cans of iced tea mix in June.

b. How many pounds of tea will be purchased in June?

Each can of iced tea mix requires 14.5 ounces of tea. To convert the production quantity into raw material purchase needs, we first convert total ounces to pounds: 1 pound = 16 ounces.

Total ounces of tea needed for June production = 612,900 cans × 14.5 ounces = 8,890,050 ounces.

Total pounds of tea = 8,890,050 ÷ 16 ≈ 555,628 pounds.

Next, we determine the ending inventory requirement for tea. The inventory policy states ending raw material inventory should equal 10% of the finished goods inventory needed for the following month. The forecasted July sales are 750,000 cans, so the desired ending inventory of tea (in ounces) for June is 10% of tea needed for July production.

Tea needed for July production = 750,000 cans × 14.5 ounces = 10,875,000 ounces. Therefore, ending inventory of tea in ounces = 10% of 10,875,000 = 1,087,500 ounces.

Convert this to pounds: 1,087,500 ÷ 16 ≈ 67,969 pounds.

Beginning inventory of tea is given as 750 pounds, which will reduce the amount needing to be purchased.

Required pounds of tea to purchase = Tea needed for production + desired ending inventory – beginning inventory = 555,628 + 67,969 – 750 ≈ 622,847 pounds.

Hence, So Sweet! needs to purchase approximately 622,847 pounds of tea in June.

c. How many pounds of sugar substitute will be purchased in June?

Each can of iced tea mix requires 1.5 ounces of sugar substitute. Total sugar substitute needed for June’s production = 612,900 cans × 1.5 ounces = 919,350 ounces.

Convert ounces to pounds: 919,350 ÷ 16 ≈ 57,466 pounds.

The starting inventory of sugar substitute is 200 pounds. The ending inventory should be 10% of the raw materials needed for July’s production. The sugar substitute needed for July is:

750,000 cans × 1.5 ounces = 1,125,000 ounces. The desired ending inventory in ounces is 10% of this, which is 112,500 ounces.

Convert to pounds: 112,500 ÷ 16 ≈ 7,031 pounds.

Required purchases of sugar substitute = 57,466 + 7,031 – 200 ≈ 64,297 pounds.

Therefore, So Sweet! will purchase approximately 64,297 pounds of sugar substitute in June.

d. What dollar amount of raw material purchases is budgeted for June?

Cost per pound of tea = $3.50; cost per pound of sugar substitute = $0.40.

Total cost for tea = 622,847 pounds × $3.50 ≈ $2,180,964.50.

Total cost for sugar substitute = 64,297 pounds × $0.40 ≈ $25,718.80.

Total raw materials budgeted for June = $2,180,964.50 + $25,718.80 ≈ $2,206,683.30.

e. What are the budgeted cash disbursements in June for June purchases? How much will So Sweet! owe for June purchases in July?

The company pays 40% of its purchases during the month of purchase, with a 2% discount if paid promptly. The total raw material purchases approximate $2,206,683.30 as previously calculated.

Cash disbursements in June = 40% of $2,206,683.30 = $882,673.32.

Discount on June payments (if paid promptly) = 2% of $882,673.32 ≈ $17,653.47.

Actual payment after discount = $882,673.32 – $17,653.47 ≈ $865,019.85.

Remaining 60% of June purchases will be paid in July: 60% of $2,206,683.30 ≈ $1,324,009.98.

Thus, So Sweet! will owe approximately $1,324,009.98 for June purchases in July.

Conclusion

Effective inventory and purchasing planning requires detailed calculations based on sales forecasts, inventory policies, and cost factors. For So Sweet!, the production and procurement estimates demonstrate the importance of aligning raw material purchases with production needs and cash flow strategies. Proper management ensures that inventory levels are maintained without overstocking and that payments are optimized to benefit from discounts, ultimately supporting the company's operational efficiency and profitability.

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