Peabody Enterprises prepared the following sales budget: $$\begin{array} { | l | r | }
\hline { \text { Month } } & \text { Budgeted Sales } \
\hline \text { March } & \$ 6,000 \
\hline \text { April } & \$ 13,000 \
\hline \text { May } & \$ 12,000 \
\hline \text { June } & \$ 14,000 \
\hline
\end{array}$$ The expected gross profit rate is 40% and the inventory at the end of February was $10,000.Desired inventory levels at the end of the month are 20% of the next month's cost of goods sold.
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What is the desired beginning inventory on June 1?

Question

Peabody Enterprises prepared the following sales budget: $$\begin{array} { | l | r | } 
\hline { \text { Month } } & \text { Budgeted Sales } \
\hline \text { March } & \$ 6,000 \
\hline \text { April } & \$ 13,000 \
\hline \text { May } & \$ 12,000 \
\hline \text { June } & \$ 14,000 \
\hline
\end{array}$$ The expected gross profit rate is 40% and the inventory at the end of February was $10,000.Desired inventory levels at the end of the month are 20% of the next month's cost of goods sold.
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What is the desired beginning inventory on June 1?

Quizplus · Accepted Answer

To determine the desired beginning inventory on June 1, we need to first calculate the cost of goods sold for May.

May cost of goods sold = May sales x Gross profit rate
May cost of goods sold = $150,000 x 40% = $60,000

Next, we need to determine the desired inventory level for June.

June desired inventory = 20% of June cost of goods sold
June desired inventory = 20% of ($200,000 x 60%)
June desired inventory = $24,000

Now we can determine the desired ending inventory for May.

May desired ending inventory = June desired inventory / 1.2
May desired ending inventory = $24,000 / 1.2
May desired ending inventory = $20,000

Finally, we can use the desired ending inventory for May and the information given about ending inventory for February to calculate the desired beginning inventory for June.

May ending inventory = $10,000
May ending inventory = May beginning inventory + May purchases - May cost of goods sold
$10,000 = May beginning inventory + ($200,000 x 60%) - $60,000
May beginning inventory = $1,680

Therefore, the desired beginning inventory on June 1 is $1,680.

Peabody Enterprises Prepared the Following Sales Budget The Expected Gross Profit Rate Is 40% and the Inventory