Brownsville Novelty Store prepared the following budget information for the month of May:

Sales are budgeted at $360,000. All sales are on account and a provision for bad debts is made for each month at three percent of sales for the month.
Inventory was $84,000 on April 30; an inventory increase of $12,000 is planned for May 31.
All inventory is marked to sell at cost plus 50 percent.
Estimated expense for selling and administrative expenses for the month are $48,000.
Depreciation for May is projected at $6,000.

Brownsville's budgeted operating income for May is:

Question

Brownsville Novelty Store prepared the following budget information for the month of May:

Sales are budgeted at $360,000. All sales are on account and a provision for bad debts is made for each month at three percent of sales for the month. 
Inventory was $84,000 on April 30; an inventory increase of $12,000 is planned for May 31. 
All inventory is marked to sell at cost plus 50 percent. 
Estimated expense for selling and administrative expenses for the month are $48,000. 
Depreciation for May is projected at $6,000.

Brownsville's budgeted operating income for May is:

Quizplus · Accepted Answer

To calculate the budgeted operating income for May, we start with the sales and subtract the cost of goods sold (COGS), bad debt expense, selling and administrative expenses, and depreciation.1. Sales are budgeted at $360,000.2. Bad debt expense is 3% of sales: $360,000 * 3% = $10,800.3. To find the COGS, we need to calculate the cost of the inventory sold. Since all inventory is marked up by 50%, the cost represents 2/3 of the sales price (100% cost + 50% markup = 150% sales price, so cost is 2/3 of sales price). The planned inventory increase is $12,000, so the ending inventory will be $84,000 + $12,000 = $96,000. We don't have the beginning inventory or purchases directly, but we can infer the cost of goods available for sale and the cost of goods sold from the information given.   - However, without the sales or purchases directly given for calculating COGS, we focus on the markup to find the gross profit margin. With a 50% markup on cost, the gross profit is 1/3 of sales (since the cost is 2/3 of sales, the profit is sales - 2/3 of sales = 1/3 of sales).   - Gross profit = $360,000 * 1/3 = $120,000.4. Selling and administrative expenses are $48,000.5. Depreciation is $6,000.Operating income = Gross profit - Bad debt expense - Selling and administrative expenses - DepreciationOperating income = $120,000 - $10,800 - $48,000 - $6,000 = $55,200.

Brownsville Novelty Store Prepared the Following Budget Information for the Month