Chu Company provided the following information related to its inventory sales and purchases for December Year 1 and the first quarter of Year 2: Desired ending inventory levels are 25% of the following month's projected cost of goods sold. Budgeted purchases of inventory in February Year 2 would be: $$\begin{array} { | l | c | c | c | c | }
\hline & \text { Dec. Year 1 } & \text { Jan. Year 2 } & \text { Feb. Year 2 } & \text { Mar. Year 2 } \
\hline & \text { (Actual) } & \text { (Budgeted) } & \text { (Budgeted) } & \text { (Budgeted) } \
\hline \text { Cost of goods sold } & \$ 80,000 & \$ 140,000 & \$ 180,000 & \$ 120,000 \
\hline
\end{array}$$
A) $135,000.
B) $165,000.
C) $180,000.
D) $225,000.

Question

Chu Company provided the following information related to its inventory sales and purchases for December Year 1 and the first quarter of Year 2: Desired ending inventory levels are 25% of the following month's projected cost of goods sold. Budgeted purchases of inventory in February Year 2 would be: $$\begin{array} { | l | c | c | c | c | } 
\hline & \text { Dec. Year 1 } & \text { Jan. Year 2 } & \text { Feb. Year 2 } & \text { Mar. Year 2 } \
\hline & \text { (Actual) } & \text { (Budgeted) } & \text { (Budgeted) } & \text { (Budgeted) } \
\hline \text { Cost of goods sold } & \$ 80,000 & \$ 140,000 & \$ 180,000 & \$ 120,000 \
\hline
\end{array}$$
A) $135,000.
B) $165,000.
C) $180,000.
D) $225,000.

Quizplus · Accepted Answer

To calculate the budgeted purchases for February Year 2, we need to consider the desired ending inventory for February and the beginning inventory for February. The desired ending inventory for February is 25% of March's projected COGS, which is 25% of $120,000 = $30,000. The beginning inventory for February is the ending inventory for January, which is 25% of February's COGS, or 25% of $180,000 = $45,000. The budgeted purchases for February are calculated as: February COGS + Desired ending inventory - Beginning inventory = $180,000 + $30,000 - $45,000 = $165,000.

Chu Company Provided the Following Information Related to Its Inventory