Hiruit company's sales in December were $5,500. They expect sales to increase 10% in January and February and 15% in March. All of its sales are made on credit. The typical collection pattern is:
$$\begin{array} { | l | c | }
\hline \text { Collections } & \text { Percentage of total receivables } \
\hline \text { In month of sale } & 10 \% \
\hline \text { In second month } & 70 \% \
\hline \text { In third month } & 15 \% \
\hline \text { Not collectible } & 5 \% \
\hline
\end{array}$$ Gross margin is 30%. Inventory levels at the end of December are $900 and are expected to grow at the same rate as sales. Purchases are paid for the month after they are made. Net accounts receivable at the end of December are $400.
-What is the anticipated inventory level at the end of March?

Question

Hiruit company's sales in December were $5,500. They expect sales to increase 10% in January and February and 15% in March. All of its sales are made on credit. The typical collection pattern is:
 $$\begin{array} { | l | c | } 
\hline \text { Collections } & \text { Percentage of total receivables } \
\hline \text { In month of sale } & 10 \% \
\hline \text { In second month } & 70 \% \
\hline \text { In third month } & 15 \% \
\hline \text { Not collectible } & 5 \% \
\hline
\end{array}$$ Gross margin is 30%. Inventory levels at the end of December are $900 and are expected to grow at the same rate as sales. Purchases are paid for the month after they are made. Net accounts receivable at the end of December are $400.
-What is the anticipated inventory level at the end of March?

Quizplus · Accepted Answer

First, we need to calculate Hiruit's sales for January, February, and March.
- January sales: $5,500 * 1.1 = $6,050
- February sales: $6,050 * 1.1 = $6,655
- March sales: $6,655 * 1.15 = $7,659.25

Next, we need to calculate Hiruit's expected accounts receivable at the end of each month, using the collection pattern given:
- December accounts receivable: $400 (given)
- January accounts receivable: $6,050 * 0.1 + $5,500 * 0.7 = $5,245
- February accounts receivable: $6,655 * 0.1 + $6,050 * 0.7 = $5,575.5
- March accounts receivable: $7,659.25 * 0.1 + $6,655 * 0.7 = $6,439.18

Now, we can calculate Hiruit's expected inventory level at the end of each month:
- December inventory: $900 (given)
- January inventory: $900 * 1.1 = $990
- February inventory: $990 * 1.1 = $1,089
- March inventory: $1,089 * 1.15 = $1,252.35

Therefore, the anticipated inventory level at the end of March is $1,252.35, which is choice A.

Hiruit Company's Sales in December Were $5,500 Gross Margin Is 30