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

Question

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

Quizplus · Accepted Answer

To calculate total purchases budgeted for May, we need to first calculate the cost of goods sold for May. We know that the gross profit rate is 20%, so the cost of goods sold will be 80% of the total sales revenue.

May sales budgeted = $40,000 
Cost of goods sold budgeted = 80% of $40,000 = $32,000

Next, we need to calculate the desired inventory level at the end of May. We are given that desired inventory levels at the end of the month are 30% of the next month's cost of goods sold.

Desired inventory at the end of May = 30% of $32,000 = $9,600

To calculate the purchases budgeted for May, we need to figure out how much inventory we need to purchase to reach the desired inventory level.

Purchases budgeted for May = desired inventory level - inventory on hand at the end of February + cost of goods sold for May 
Purchases budgeted for May = $9,600 - $5,000 + $32,000 
Purchases budgeted for May = $36,600 - $5,000 
Purchases budgeted for May = $31,600

Therefore, the total purchases budgeted for May is $10,480 (Choice D).

Sander Enterprises Prepared the Following Sales Budget: the Expected