Fosnight Enterprises prepared the following sales budget: The expected gross profit rate is 20% and the inventory at the end of February was $8000. 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 20% and the inventory at the end of February was $8000. 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 first calculate the cost of goods sold for May.

Cost of Goods Sold = Total Sales x Gross Profit Rate = $420,000 x 0.20 = $84,000

Next, we need to calculate the desired inventory at the end of May:

Desired Ending Inventory = 20% x Cost of Goods Sold for June = 20% x $350,000 = $70,000

Given that the desired ending inventory at the end of February was $8,000, we can calculate the required increase in inventory over the next few months:

Increase in Inventory = Desired Ending Inventory - Beginning Inventory = $70,000 - $8,000 = $62,000

Finally, we can use the gross profit rate to estimate the cost of goods sold for May and April:

CGS for May = Total Sales in May x Gross Profit Rate = $420,000 x 0.20 = $84,000
CGS for April = Total Sales in April x Gross Profit Rate = ($420,000 - $84,000) x 0.20 = $67,200

To calculate the desired beginning inventory on June 1, we need to add the increase in inventory to the cost of goods sold for May, and then subtract the inventory at the end of May:

Desired Beginning Inventory = Cost of Goods Sold for April + Cost of Goods Sold for May + Increase in Inventory - Desired Ending Inventory 
= $67,200 + $84,000 + $62,000 - $70,000 
= $143,200

Therefore, the desired beginning inventory on June 1 is $3,200 (choice C).

Fosnight Enterprises Prepared the Following Sales Budget: the Expected