Fosnight Enterprises prepared the following sales budget: The expected gross profit rate is 30% and the inventory at the end of February was $5000. Desired inventory levels at the end of the month are 20% of the next month's cost of goods sold.
What are the total purchases budgeted 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 $5000. Desired inventory levels at the end of the month are 20% of the next month's cost of goods sold.
What are the total purchases budgeted for May?

Quizplus · Accepted Answer

First, we need to calculate the cost of goods sold for May using the sales budget and the gross profit rate: 
May Sales = $28,000 
Cost of goods sold = (100% - 30%) x $28,000 = $19,600 
Next, we need to calculate the desired ending inventory for May: 
Desired ending inventory = 20% x $19,600 = $3,920 
We can then calculate the required purchases for May: 
Required purchases = cost of goods sold + desired ending inventory - beginning inventory 
Beginning inventory = $5,000 
Required purchases = $19,600 + $3,920 - $5,000 = $18,520 
However, we need to convert this amount to purchases for May, which are made in April. Assuming a 30-day month, we can calculate the average cost per day: 
Average cost per day = $18,520 / 30 = $617.33 
We can then multiply this by the number of days in April to get the total purchases budgeted for May: 
Total purchases = $617.33 x 30 = $18,520 
Answer choices A and D are too low, while answer choice B is too high. Therefore, the best choice is C, $7840.

Fosnight Enterprises Prepared the Following Sales Budget: the Expected