Figure 8-6 The records of Morgantown, Inc.show the following forecasted sales:
Collection pattern:
60 percent in month of sale
40 percent in month following the sale
The company has a selling price of $10 per unit and expects to maintain ending inventories equal to 20 percent of next month's sales.
Refer to Figure 8-6. How many dollars are expected to be collected in October?
A) $420,000
B) $460,000
C) $240,000
D) $510,000

Question

Figure 8-6 The records of Morgantown, Inc.show the following forecasted sales:
 Collection pattern:
60 percent in month of sale
40 percent in month following the sale
 The company has a selling price of $10 per unit and expects to maintain ending inventories equal to 20 percent of next month's sales.
Refer to Figure 8-6. How many dollars are expected to be collected in October?
A) $420,000 
B) $460,000 
C) $240,000 
D) $510,000

Quizplus · Accepted Answer

To find out the expected sales of October, we need to calculate the sales made in September and August. 
In September, the sales are:
60%*$500,000 = $300,000
40%*60%*$500,000 = $120,000
Total sales in September = $420,000

In August, the sales are:
60%*$400,000 = $240,000
40%*60%*$400,000 = $96,000
Total sales in August = $336,000

The expected ending inventory for October is 20% of September's sales, which is:
20%*$420,000 = $84,000

Therefore, the total expected sales for October is:
($420,000 + $336,000) - $84,000 = $672,000 - $84,000 = $588,000

The expected collections in October are:
60%*$588,000 = $352,800
40%*$588,000 = $235,200

Therefore, the total expected collections in October are:
$352,800 + $235,200 = $588,000

Hence, the correct answer is B) $460,000.

Figure 8-6 the Records of Morgantown, Inc