Sander Enterprises prepared the following sales budget: The expected gross profit rate is 20% and the inventory at the end of February was $15,000. Desired inventory levels at the end of the month are 30% of the next month's cost of goods sold.
What is the desired ending inventory on May 31?

Question

Sander Enterprises prepared the following sales budget:  The expected gross profit rate is 20% and the inventory at the end of February was $15,000. Desired inventory levels at the end of the month are 30% of the next month's cost of goods sold.
What is the desired ending inventory on May 31?

Quizplus · Accepted Answer

First, we need to calculate the cost of goods sold for the months March, April, and May using the sales budget given and the gross profit rate of 20%:

March cost of goods sold = $130,000 * (1 - 0.20) = $104,000
April cost of goods sold = $120,000 * (1 - 0.20) = $96,000
May cost of goods sold = $140,000 * (1 - 0.20) = $112,000

Next, we need to calculate the desired ending inventory levels for April and May, using the formula given in the problem:

Desired April ending inventory = 30% * $104,000 = $31,200
Desired May ending inventory = 30% * $96,000 = $28,800

Finally, we can calculate the desired inventory on May 31 by subtracting the cost of goods sold for May from the desired May ending inventory:

Desired inventory on May 31 = $28,800 - $112,000 = -$83,200

This answer does not make sense, as we cannot have a negative inventory. Therefore, we need to recalculate the desired May ending inventory using the inventory from February as a starting point:

February inventory = $15,000
March cost of goods sold = $104,000
Desired March ending inventory = 30% * $96,000 = $28,800
Desired April ending inventory = 30% * $104,000 = $31,200

April inventory = February inventory + March cost of goods sold - Desired March ending inventory
= $15,000 + $104,000 - $28,800 = $90,200

May cost of goods sold = $112,000
Desired May ending inventory = 30% * $112,000 = $33,600

Desired inventory on May 31 = $33,600 - $112,000 = -$78,400

Again, we have a negative inventory, so we need to adjust the desired May ending inventory. This time, we will calculate the desired ending inventory based on the average cost of goods sold for April and May:

Average cost of goods sold = ($96,000 + $112,000) / 2 = $104,000
Desired May ending inventory = 30% * $104,000 = $31,200

Desired inventory on May 31 = $31,200 - $112,000 = -$80,800

Once again, we have a negative inventory, but this is the closest answer choice. The best choice is therefore (C), $33,600, as it is the closest to the calculated amount and is the most reasonable choice given the information provided.

Sander Enterprises Prepared the Following Sales Budget: the Expected