A business makes and sells bikes for $500 each.

Here are the expected production in units:

Quarter 1: 3,600 bikes

Quarter 2: 3,000 bikes

Quarter 3: 2,700 bikes

To make the bike requires 20 parts which cost $10 each.

The business likes to keep 5% of next months parts needed ending inventory.

What is the direct materials budget for Quarter 2?

Question

A business makes and sells bikes for $500 each.

Here are the expected production in units:

Quarter 1: 3,600 bikes

Quarter 2: 3,000 bikes

Quarter 3: 2,700 bikes

To make the bike requires 20 parts which cost $10 each.

The business likes to keep 5% of next months parts needed ending inventory.

What is the direct materials budget for Quarter 2?

BlackTom AI · Accepted Answer

We start by restating the problem in our own words and identifying what needs to be calculated: the direct materials budget for Quarter 2.

Step 1: Determine materials per bike and total production in Quarter 2.
- Each bike requires 20 parts.
- Quarter 2 production is 3,000 bikes.
- Total parts required for Q2 production = 3,000 bikes × 20 parts/bike = 60,000 parts.
- Cost per part is $10, so the direct materials cost for the production portion (if we were expensing only what’s used in production) would be 60,000 parts × $10 = $600,000.

Step 2: Interpret ending inventory requirement (2nd quarter).
- The company wants to keep 5% of the next month’s parts as ending inventory for the quarter.
- The phrase "next month’s parts needed" typically translates to the following quarter’s production needs.
- Quarter 3 production is 2,700 bikes, so required parts for Q3 = 2,700 × 20 = 54,000 parts.
- Ending inventory for Quarter 2 = 5% of 54,000 parts = 2,700 parts.

Step 3: Determine beginning inventory for Quarter 2.
- Beginning inventory for Q2 equals ending inventory of Q1.
- Ending inventory for Q1 is 5% of Quarter 2’s parts needed (since Q2 is the next month’s demand after Q1).
- Quarter 2 parts needed = 60,000 parts (as calculated in Step 1).
- Beginning inventory for Q2 = 5% × 60,000 = 3,000 parts.

Step 4: Apply the direct materials budget formula for Quarter 2.
- Direct materials to be purchased = (Parts needed for Q2 production) + (Ending inventory of Q2) − (Beginning inventory of Q2).
- Parts needed for Q2 production = 60,000 parts.
- Ending inventory (Q2) = 2,700 parts.
- Beginning inventory (Q2) = 3,000 parts.
- Purchases = 60,000 + 2,700 − 3,000 = 59,700 parts.

Step 5: Convert purchases to dollars.
- Each part costs $10.
- Total direct materials budget for Q2 = 59,700 parts × $10/part = $597,000.

Now, evaluate the given answer options:
- Option "$627,000": This would imply a different set of numbers, likely a miscalculation such as using the full 60,000 parts for production without adjusting for beginning and ending inventories, or misplacing the ending inventory value. It does not align with the 5% rule applied to the next month’s demand and with the correct beginning inventory.
- Option "$603,000": This would correspond to 60,300 parts purchased (since 60,300 × $10 = $603,000) or a similar miscalculation, perhaps treating the ending inventory incorrectly or forgetting to subtract beginning inventory.
- Option "I don't know.": This is not a calculation but a statement of uncertainty; the problem can be solved with the given data, so this choice is not appropriate.
- Option "$597,000": This matches the correct calculation: 59,700 parts purchased at $10 each equals $597,000, after correctly accounting for production needs, ending inventory, and beginning inventory in Quarter 2.

If you want, I can show an alternative method or create a quick table to visualize the components (beginning inventory, purchases, and ending inventory) for each quarter to reinforce the same result.

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