Prestwich Company has budgeted production for next year as follows$\begin{array}{lrr}
\text {Quarter } &\text { First}&\text { Second}&\text { Third}&\text { Fourh }\\
\text { Production in units } &60,000&80,000&90,000&70,000\
\end{array}$

Two pounds of material A are required for each unit produced. The company has a policy of maintaining a stock of material A on hand at the end of each quarter equal to 25% of the next quarter's production needs for materialA. A total of 30,000 pounds of material A are on hand to start the year. Budgeted purchases of material A for the second quarter would be:

A)82,500 pounds.
B)165,000 pounds.
C)200,000 pounds.
D)205,000 pounds.

Question

Prestwich Company has budgeted production for next year as follows$\begin{array}{lrr}
  \text {Quarter  } &\text { First}&\text { Second}&\text { Third}&\text { Fourh }\\
 \text { Production in units } &60,000&80,000&90,000&70,000\
\end{array}$

Two pounds of material A are required for each unit produced. The company has a policy of maintaining a stock of material A on hand at the end of each quarter equal to 25% of the next quarter's production needs for materialA. A total of 30,000 pounds of material A are on hand to start the year. Budgeted purchases of material A for the second quarter would be:

A)82,500 pounds.
B)165,000 pounds.
C)200,000 pounds.
D)205,000 pounds.

Quizplus · Accepted Answer

The production for the second quarter is 80,000 units, requiring 160,000 pounds of material A (80,000 units x 2 pounds/unit). The ending inventory for the second quarter should be 25% of the third quarter's needs, which is 45,000 pounds (90,000 units x 2 pounds/unit x 25%). The beginning inventory for the second quarter is the ending inventory of the first quarter, which is 40,000 pounds (80,000 units x 2 pounds/unit x 25%). Therefore, the purchases for the second quarter are 165,000 pounds (160,000 + 45,000 - 40,000).

Prestwich Company Has Budgeted Production for Next Year as Follows