Vassallo Inc. Has The Following Budgeted Sales For The Selec

Vassallo Inc Has The Following Budgeted Sales For The Selected Six

Vassallo Inc has the following budgeted sales for a six-month period: January 15,000 units, February 20,000 units, March 35,000 units, April 25,000 units, May 30,000 units, June 20,000 units. Beginning inventory in January is 7,500 units, and the company plans to maintain an ending inventory each month equal to 20% of the subsequent month's sales. Additionally, each unit requires 3 pounds of materials, with each pound costing $20. Material inventory on January 1 was 5,000 pounds, and inventory levels are targeted at 30% of the next month's material needs. The assignment involves two tasks: (a) preparing production budgets in units for February, March, and April, and (b) preparing a materials purchase budget in pounds and dollars for the same months.

Paper For Above instruction

Introduction

The budgeting process is an integral part of financial planning and control for manufacturing companies like Vassallo Inc. It facilitates the effective coordination of production and procurement activities to meet sales demands while maintaining optimal inventory levels. This paper aims to develop a detailed production budget and materials purchase plan for three upcoming months—February, March, and April—based on the company's sales forecast, inventory policies, and material requirements.

Part A: Production Budget Calculation

The production budget determines the number of units that need to be produced each month to meet sales demand and inventory requirements. It uses the following formula:

Required Production = Projected Sales + Desired Ending Inventory – Beginning Inventory

Where:

  • Projected Sales = units expected to be sold in the month
  • Desired Ending Inventory = 20% of the next month's sales
  • Beginning Inventory = units available at the start of the month

Calculations for February

Sales forecast for February: 20,000 units

Next month (March) sales: 35,000 units

Desired ending inventory for February: 20% of March sales = 0.20 * 35,000 = 7,000 units

Beginning inventory for February: 7,500 units (from January end) assuming January end inventory equal to December’s forecast or initial conditions (assuming prior to February, beginning inventory is January's ending inventory), for simplicity, use the initial beginning inventory for February.

Production for February:

= 20,000 + 7,000 – 7,500 = 19,500 units

Calculations for March

Sales forecast for March: 35,000 units

Next month (April) sales: 25,000 units

Desired ending inventory for March: 20% of April sales = 0.20 * 25,000 = 5,000 units

Beginning inventory for March: 7,000 units (February's ending inventory)

Production for March:

= 35,000 + 5,000 – 7,000 = 33,000 units

Calculations for April

Sales forecast for April: 25,000 units

Next month (May) sales: 30,000 units

Desired ending inventory for April: 20% of May sales = 0.20 * 30,000 = 6,000 units

Beginning inventory for April: 5,000 units (March's ending inventory)

Production for April:

= 25,000 + 6,000 – 5,000 = 26,000 units

Part B: Materials Purchase Budget

The materials purchase budget calculates the pounds of raw material needed and the corresponding cost to meet production requirements while maintaining the target inventory levels.

  1. Materials needed for production each month:
  • Required units to produce × 3 pounds per unit

Initial inventory on January 1 is 5,000 pounds, and the targeted ending inventory each month equals 30% of the following month's material needs.

Materials requirement calculations for February

  • Units to produce: 19,500 units
  • Materials needed for production: 19,500 × 3 = 58,500 pounds
  • Next month (March) materials requirement: 33,000 units × 3 = 99,000 pounds
  • Desired ending inventory for February: 30% of March’s needs = 0.30 × 99,000 = 29,700 pounds
  • Beginning inventory (January 1): 5,000 pounds

Materials to purchase in pounds:

= Materials needed for production + Desired ending inventory – Beginning inventory


= 58,500 + 29,700 – 5,000 = 83,200 pounds

Cost in dollars:

= 83,200 pounds × $20 per pound = $1,664,000

Materials requirement calculations for March

  • Units to produce: 33,000 units
  • Materials needed for production: 33,000 × 3 = 99,000 pounds
  • Next month (April) materials needs: 26,000 × 3 = 78,000 pounds
  • Desired ending inventory for March: 30% of April’s needs = 0.30 × 78,000 = 23,400 pounds
  • Beginning inventory (February’s ending inventory): 29,700 pounds

Materials to purchase:

= 99,000 + 23,400 – 29,700 = 92,700 pounds

Cost in dollars:

= 92,700 × $20 = $1,854,000

Materials requirement calculations for April

  • Units to produce: 26,000 units
  • Materials needed for production: 26,000 × 3 = 78,000 pounds
  • Next month (May) materials needs: 30,000 × 3 = 90,000 pounds
  • Desired ending inventory for April: 30% of May’s needs = 0.30 × 90,000 = 27,000 pounds
  • Beginning inventory (March’s ending inventory): 23,400 pounds

Materials to purchase:

= 78,000 + 27,000 – 23,400 = 81,600 pounds

Cost in dollars:

= 81,600 × $20 = $1,632,000

Conclusion

The detailed production and materials purchase budgets enable Vassallo Inc to align its manufacturing output with sales forecasts and inventory policies effectively. Producing approximately 19,500 units in February, 33,000 units in March, and 26,000 units in April ensures sales demands are met while maintaining optimal inventory levels. Correspondingly, purchasing around 83,200 pounds, 92,700 pounds, and 81,600 pounds of raw materials in February, March, and April, respectively, at a total cost exceeding one million dollars each month, reflects prudent raw material procurement aligned with production schedules. These budgets serve as critical tools for operational planning and financial management, reducing excess inventory costs and avoiding stockouts.

References

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