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 budgeted cost of goods sold for May?

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 budgeted cost of goods sold for May?

Quizplus · Accepted Answer

We need to first calculate the desired inventory level for May. 
Desired inventory at the end of May = 20% of cost of goods sold in June 
= 20% x (160+180+200+220) = $35.20 (rounding off to nearest dollar)

Now, we can calculate the budgeted cost of goods sold for May:
Sales for May = $200
Cost of goods sold = Sales / (1 - Gross profit rate%) 
= $200 / (1 - 30%) = $285.71
Inventory at the end of May = Desired inventory at end of June = $35.20
Therefore, Cost of goods sold for May = Beginning inventory + Purchases - Ending inventory 
$285.71 = $10,000 + Purchases - $35.20 
Purchases = $285.71 - $10,000 + $35.20 = $-9,679.09 (negative implies sales exceeding the inventory balance)

As a negative value is not practically possible in this scenario, we need to re-calculate the gross profit rate or the expected sales volume. However, the closest option with a positive value is D) $8,400, which is the closest to the cost of goods sold for February ($8,000) and has been rounded to the nearest hundred.

Fosnight Enterprises Prepared the Following Sales Budget: the Expected