We need to determine the beginning raw materials inventory, the ending raw materials inventory and the amount of raw materials needed for production, so we can determine how much raw material will need to be purchased for the given production period of July through September. Beginning inventory of raw materials as of July 1 needs to be 30% of July's production requirements: 10,000 × 2 pounds per unit × 30% = 6,000 lb. The question tells us that the company forecasts that there will be 6,000 pounds of raw material on hand at the end of June, so the beginning inventory for July will be sufficient (i.e., no additional raw materials will need to be purchased to adjust the beginning inventory). Ending inventory of raw materials for September needs to be 30% of October's production requirements: 11,000 × 2 pounds per unit × 30% = 6,600 lb. The number of units to be produced from July through September is 35,000 units (10,000 + 12,000 + 13,000). The amount of raw materials required for production in these three months is 70,000 lb. (35,000 × 2 pounds per unit). Now we can calculate the amount of materials that the company will need to purchase during these three months. The standard calculation for inventory is as follows, and if we know three of the four numbers, we can always find the fourth one: Beginning Inventory 6,000 Plus: Purchases ? Minus: Materials Used ?70,000 Equals: Ending Inventory 6,600 We can solve this with an algebraic equation, or we can simply "back into" the missing purchases number: 6,000 + X ? 70,000 = 6,600 X ? 64,000 = 6,600 X = 70,600 We know that the difference in the price of materials purchased before June 30th and after June 30th is $0.10 ($1.10 ? $1.00). Thus, the effect of the price increase for raw materials for the given period is $7,060 ($0.10 × 70,600).
This answer results from using the total number of finished goods units to be produced to calculate the ending raw materials inventory and the amount of raw materials to be purchased, as if one unit of raw materials were required for each unit of finished goods. This is incorrect because each unit of finished goods requires two pounds of raw materials, not one pound.
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This is the number of pounds of raw material in beginning inventory on July 1 (6,000) multiplied by the amount of the price increase (10% of $1.00, or $.10). To answer this question, it is necessary to find the number of pounds of raw material that will need to be purchased during the three-month period and multiply that by the $.10 per pound price increase.
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