This answer does not consider the fact that 2 pounds of raw materials are needed to produce one unit of finished product. See the correct answer for a complete explanation.
This is the 10,000 units to be sold during January multiplied by $4 per pound of raw materials. This is incorrect for two reasons: (1) It does not consider beginning and ending inventories of finished goods, which will affect the number of units to be produced during the month; and (2) It does not consider that 2 pounds of raw materials are required to produce each unit of finished goods.
Since no materials inventory is kept on hand, the amount of materials purchased each month is equal to the production requirements. Thus, the first thing we need to determine is the finished goods production in January by using the formula of the physical flow of goods: Beginning Inventory + Units Produced ? Units Sold = Ending Inventory. Finished goods inventory is equal to 25% of the following month's budgeted sales. January sales are budgeted at 10,000 units. Thus, the ending finished goods inventory for December, which is the same as the beginning inventory for January, will be 25% of 10,000, or 2,500 units. February sales are budgeted at 12,000 units, so the ending inventory for January will be 25% of 12,000, or 3,000 units. Plugging the numbers for finished goods into the formula we get: 2,500 + Units Produced ? 10,000 = 3,000. Solving for Units Produced, we get Units Produced = 10,500. Since the company makes payment the month after the purchase, January raw material purchases will be paid in February. Now we can determine the cash outlay for raw materials in February: 10,500 units × 2 lb. × $4.00 = $84,000.
This is the number of raw material purchases in January in pounds. See the correct answer for a complete explanation.
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