Argyle Company forecasts sales of $50 000 in January, $60 000 in February, $70 000 in March, and $75 000 in April. The inventory balance at 1 January is $12 000. Cost of sales is budgeted at 40% of sales revenue. Argyle wishes to have inventory levels at the end of each month equal to 60% of cost of sales for the following month, plus a "safety cushion" of $1 000. How much should be budgeted for inventory purchases in February?

Question

Quizplus · Accepted Answer

To calculate February's inventory purchases:  1. Calculate February's cost of sales: $60,000 * 40% = $24,000.  2. Calculate March's cost of sales: $70,000 * 40% = $28,000.  3. Desired ending inventory for February: 60% of March's cost of sales + $1,000 = 0.6 * $28,000 + $1,000 = $17,800.  4. Beginning inventory for February: Ending inventory of January = 60% of February's cost of sales + $1,000 = 0.6 * $24,000 + $1,000 = $15,400.  5. Inventory purchases for February: Desired ending inventory + Cost of sales for February - Beginning inventory = $17,800 + $24,000 - $15,400 = $26,400.

Argyle Company Forecasts Sales of $50 000 in January, $60