[mimi]

NINJA Question –

Can someone help me understand this question?

Augusta, Inc., expects manufacturing and sales of 70,000 units of product Maggie, its only product, to occur evenly over a 10-week period. Augusta pays for materials in the week following use. The balance of accounts payable for materials at the beginning of the 10-week period is $40,000. There are no beginning inventories. The fol¬lowing information pertains to product Maggie for the 10-week period:

Sales price $11 per unit
Materials $3 per unit
Manufacturing conversion costs—Fixed $210,000
Variable $2 per unit
Selling and administrative costs—Fixed $45,000
Variable $1 per unit

What amount should Augusta budget for cash payments to material suppliers during the period?
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Answer is $229,000 – Manufacturing and sales occur evenly over the period, so each week has the same production and sales. At 70,000 units, that is 7,000 units per week. Cash payments for materials are $3 per unit, so payments for material for one week’s production is $21,000.
They will pay $40,000 at the beginning of the period for beginning accounts payable in addition to paying for 70,000 units at $3 per unit, or $210,000, for a total of $250,000. However, the materials used during the last week, 7,000 units at $3, or $21,000, will not be paid until the first week after the end of the period, reducing cash payments during the period down to $229,000.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
I thought a payment for material happens every week for its usage for a previous week’s production. Thus, weekly production amount (7,000) multiple 3 dollars = 21,000 plus the beginning AP 40,000 = 61,000
Why does the answer use the whole 10-week production amount (70,000) for the calculation?
Thank you!

[Ginja_CPA]

So take it one part at a time to start with. What exactly do you know?

We know that they have a Beg. A/P for $40,000 for materials.

We know that they are buying 70,000 units equally over 10 weeks, or 7,000 units a week. They pay for these a week FOLLOWING use, so week one use will be paid in week two.

If you take what we know about how much they will pay in the 10 week period, you'll have 7,000 units x 9 weeks x $3 per unit, you get $189,000 for what they will pay in this period. You always have the other $40,000 of material they used in the week prior to this period, which is also paid in this period. So you have Beg. AP of $40,000 + $189,000 = $229,000.

REG: 80 (02/19/16)
AUD: 83 (04/11/16)
BEC: 78 (05/28/16)
FAR: ?

[mimi]

Thank you I understood!

[Author]

Replies