May Corporation, a merchandising firm, has budgeted sales as follows for the third quarter of the year: Cost of goods sold is equal to 65% of sales. The company wants to maintain a monthly ending inventory equal to 130% of the Cost of Goods Sold for the following month. The inventory on June 30 is less than this ideal since it is only $65,000. The company is now preparing a Merchandise Purchases Budget. The budgeted purchases for July are:
A)$52,000
B)$63,050
C)$47,450
D)$91,050

Question

May Corporation, a merchandising firm, has budgeted sales as follows for the third quarter of the year:  Cost of goods sold is equal to 65% of sales. The company wants to maintain a monthly ending inventory equal to 130% of the Cost of Goods Sold for the following month. The inventory on June 30 is less than this ideal since it is only $65,000. The company is now preparing a Merchandise Purchases Budget. The budgeted purchases for July are:
A)$52,000 
B)$63,050 
C)$47,450 
D)$91,050

Quizplus · Accepted Answer

First, we need to calculate the cost of goods sold for each month:
July: $300,000 x 65% = $195,000
August: $330,000 x 65% = $214,500
September: $360,000 x 65% = $234,000

Then, we need to calculate the ideal ending inventory for each month:
July: $195,000 x 130% = $253,500
August: $214,500 x 130% = $279,150
September: $234,000 x 130% = $304,200

Since the inventory on June 30 is only $65,000, we need to purchase more inventory for July to make up the difference:
Ideal ending inventory - Actual ending inventory = Required purchases
$253,500 - $65,000 = $188,500

Therefore, the budgeted purchases for July should be $195,000 + $188,500 = $383,500.

However, we need to subtract the beginning inventory for July to get the actual purchases:
Actual purchases = Budgeted purchases + Beginning inventory - Ending inventory
Actual purchases = $383,500 + $65,000 - $253,500 = $195,000

Therefore, the answer is B) $63,050.

May Corporation, a Merchandising Firm, Has Budgeted Sales as Follows