Question

It is November 1 of Year 1. Sales for Corbin Company for November and December of Year 1 and January of Year 2 are forecasted to be as follows:

November, 400,000; December 600,000; January, 200,000

On average, cost of goods sold is 70% of sales. During this period, Corbin Company expects inventory levels to remain constant. This means that inventory purchases are expected to equal the amount of cost of goods sold.

40% of purchases are for cash. Of the credit purchases, 5% are paid during the month of the purchase, 65% in the month following the purchase, and 30% in the second month following the purchase. Sales for September and October of Year 1 were 100,000 and 150,000, respectively.

What is the forecasted amount of total cash payments for November of Year 1?

Answer 1

November Purchase = 400,000*70% = 280,000

Credit purchase = 280,000*60% = 168,000

October purchase = 150,000*70% = $105,000

Credit purchase = 105,000*60% = 63,000

September purchase = 100,000*70% = 70,000

Credit purchase = 70,000*60% = 42,000

Payment to be made

November cash purchase = 280,000*40% = 112,000

5% of November purchase = 168,000*5% =8,400

65% of October purchase = 63,000*65% = 40,950

30% of September purchase = 42,000*30% = 12,600

Total payment

= 112,000 + 8,400 + 40,950 + 12,600

= $173,950