Fosnight Enterprises prepared the following sales budget: The expected gross profit rate is 30% and the inventory at the end of February was $10,000. Desired inventory levels at the end of the month are 20% of the next month's cost of goods sold.
What is the desired beginning inventory on June 1?

Question

Fosnight Enterprises prepared the following sales budget:  The expected gross profit rate is 30% and the inventory at the end of February was $10,000. Desired inventory levels at the end of the month are 20% of the next month's cost of goods sold.
What is the desired beginning inventory on June 1?

Quizplus · Accepted Answer

To calculate the desired beginning inventory on June 1, we need to follow these steps:

1. Calculate the cost of goods sold (COGS) for May.

COGS for May = Total sales in May x (100% - Gross profit rate)
COGS for May = $400,000 x 70% = $280,000

2. Calculate the desired inventory levels for June 30.

Desired inventory for June 30 = 20% x COGS for June
Desired inventory for June 30 = 20% x ($500,000 x 70%) = $70,000

3. Calculate the desired inventory for June 1.

Desired inventory for June 1 = Desired inventory for June 30 - Inventory at the end of February + Inventory purchases in March + Inventory purchases in April + Inventory purchases in May
Desired inventory for June 1 = $70,000 - $10,000 + $160,000 + $192,000 + $224,000
Desired inventory for June 1 = $636,000

Therefore, the desired beginning inventory on June 1 is $1,960 (Choice C).

Fosnight Enterprises Prepared the Following Sales Budget: the Expected