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Card Bicycle Co. has prepared production and raw materials budgets for next year. At the end of this year, the finished product inventory is expected to include 2,000 bicycles, and raw material inventory is expected to include 3,000 bicycle tires. Each finished bicycle requires two tires. The marketing department provided the following data from the sales budget for the first quarter:

Expected bicycle sales (units)
- January: 12,000
- February: 16,000
- March: 18,000

The company inventory policy is to have finished product inventory equal to 20% of the following month’s sales requirements, and raw material equal to 10% of the following month’s production requirements.

In the January budget for raw materials, how many tires are expected to be purchased?

A. 26,600
B. 26,680
C. 24,200
D. 26,120

Answer :

Final answer:

To calculate the number of tires expected to be purchased for the January production, consider the raw material policy of the Card Bicycle Co. and the given data on sales, production, and inventory. After performing a series of calculations based on this information, you will find that you are expected to purchase 26,600 tires for January, so the correct answer is A. 26,600.

Explanation:

To calculate the number of tires expected to be purchased for the January production, you need to consider the raw material policy of the Card Bicycle Co., as well as the given data on the bicycle sales, bicycle production, and current inventory of bicycles and tires.

First, let's calculate the bicycle production need for January. The given data states that February's bicycle sales expectation is 16,000 units and that the company's policy is to have finished product inventory equal to 20% of the following month’s sales. This implies that by the end of January, we need (16,000 * 20/100) = 3,200 bicycles in the inventory. As the inventory at the end of this year will already include 2,000 bicycles, this means that during January the production needs to be (12,000 + 3,200 - 2,000) = 13,200 bicycles.

Because each bicycle requires two tires, we need to purchase 2 * 13,200 = 26,400 tires for production. Meanwhile, the policy also states that the raw material should equal 10% of the following month's production requirements, so there will need to be 10% * 2 * 16,000 = 3,200 tires in inventory at the end of January. As the current inventory of tires is at 3,000, this means you will need to purchase an additional (26,400 + 3,200 - 3,000) = 26,600 tires for the January production. Therefore, the correct answer is A. 26,600.

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