Lee Carter Inc.forecast of sales is as follows: July,$50,000;August,$80,000;September,$150,000.Sales are normally 75 percent cash and 25 percent credit.Credit sales are collected in full in the following month.Merchandise cost averages 70 percent of sales price.The company desires an inventory as of September 30 of $50,000.The inventory as of June 30 was $30,000.The accounts receivable had zero balance on June 30.
-Total purchases that must be made in order to meet sales and inventory requirements of Lee Carter for the quarter amount to

Question

Lee Carter Inc.forecast of sales is as follows: July,$50,000;August,$80,000;September,$150,000.Sales are normally 75 percent cash and 25 percent credit.Credit sales are collected in full in the following month.Merchandise cost averages 70 percent of sales price.The company desires an inventory as of September 30 of $50,000.The inventory as of June 30 was $30,000.The accounts receivable had zero balance on June 30. 
-Total purchases that must be made in order to meet sales and inventory requirements of Lee Carter for the quarter amount to

Quizplus · Accepted Answer

To determine the total purchases required, we need to first calculate the total sales for each month and then determine the cash and credit sales as well as the accounts receivable for each month:

July sales: $50,000
Cash sales: $37,500 ($50,000 x 75%)
Credit sales: $12,500 ($50,000 x 25%)
Accounts receivable: $12,500

August sales: $80,000
Cash sales: $60,000 ($80,000 x 75%)
Credit sales: $20,000 ($80,000 x 25%)
Accounts receivable: $32,500 ($12,500 previous balance + $20,000 credit sales)

September sales: $150,000
Cash sales: $112,500 ($150,000 x 75%)
Credit sales: $37,500 ($150,000 x 25%)
Accounts receivable: $70,000 ($32,500 previous balance + $37,500 credit sales)

Next, we need to determine the cost of merchandise for each month based on the given merchandise cost percentage:

July cost of merchandise: $35,000 ($50,000 x 70%)
August cost of merchandise: $56,000 ($80,000 x 70%)
September cost of merchandise: $105,000 ($150,000 x 70%)

Now, we can determine the total purchases required to meet the sales and inventory requirements for the quarter:

Total purchases = cost of merchandise for quarter - inventory increase

Cost of merchandise for quarter: $35,000 + $56,000 + $105,000 = $196,000

Inventory increase: $50,000 - $30,000 = $20,000

Total purchases required: $196,000 - $20,000 = $176,000

Therefore, the answer is not B) $176,000. This is a common mistake, as it only takes into account the cost of merchandise and inventory increase, but not the accounts receivable and credit sales for each month.

The correct answer is A) $216,000, as we need to also consider the accounts receivable and credit sales for each month. The total purchases required is calculated as follows:

Total credit sales: $12,500 + $20,000 + $37,500 = $70,000

Accounts receivable at end of quarter: $70,000

Total purchases = cost of merchandise for quarter - inventory increase + accounts receivable increase

Cost of merchandise for quarter: $196,000

Inventory increase: $50,000 - $30,000 = $20,000

Accounts receivable increase: $70,000 - $0 = $70,000

Total purchases required: $196,000 - $20,000 + $70,000 = $246,000

However, this answer includes the total purchases required for the entire quarter, not just for the month of September.