Chestnut Corporation has budgeted sales as follows:
April: $400,000
May: $360,000
June: $440,000
July: $520,000
Chestnut's gross margin is 20% of sales and their desired inventory levels are 40% of the next month's cost of goods sold. Chestnut pays for their inventory purchases during the month after purchase. How much are Chestnut's budgeted payments for inventory purchases for the month of June?

Question

Quizplus · Accepted Answer

To calculate Chestnut's budgeted payments for inventory purchases for June, we first need to determine the cost of goods sold (COGS) for each month and then the desired inventory levels. The gross margin is 20% of sales, which means the COGS is 80% of sales (since Gross Margin = Sales - COGS, and if Gross Margin is 20% of Sales, then COGS must be 80% of Sales to make the total 100%).1. Calculate COGS for each month:   - April: $400,000 * 80% = $320,000   - May: $360,000 * 80% = $288,000   - June: $440,000 * 80% = $352,000   - July: $520,000 * 80% = $416,0002. Calculate desired inventory levels (40% of the next month's COGS):   - End of April (for May): $288,000 * 40% = $115,200   - End of May (for June): $352,000 * 40% = $140,800   - End of June (for July): $416,000 * 40% = $166,4003. Determine the budgeted payments for June, which are based on purchases made in May. To find the purchases for May, we need to ensure the ending inventory for May is sufficient for June's beginning inventory requirement. The formula for purchases is: Purchases = COGS + Ending Inventory - Beginning Inventory.   - Beginning Inventory for May = Ending Inventory for April = $115,200   - Ending Inventory for May (which is the beginning inventory for June) = $140,800   - COGS for May = $288,000   So, Purchases for May = $288,000 + $140,800 - $115,200 = $313,600.Therefore, Chestnut's budgeted payments for inventory purchases in June, which are based on May's purchases, are $313,600.

Chestnut Corporation Has Budgeted Sales as Follows