Question

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

November, 300,000; December 700,000; January, 200,000

On average, cost of goods sold is 60% of sales. During this period, Burt Company expects inventory levels to remain constant. This means that inventory purchases are expected to equal the amount of cost of goods sold.

90% of purchases are on credit. Of the credit purchases, 5% are paid during the month of the purchase, 35% in the month following the purchase, and 60% 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 purchases in January of Year 2? (Note: This is the sum of immediate payments from cash purchases, same-month cash payments of credit purchases, and cash payments for credit purchases made in prior months.)

Answer 1

January Purchase = 200,000*60% = 120,000

Credit purchase = 120,000*90% = 108,000

December purchase = 700,000*60% = $420,000

Credit purchase = 420,000*90% = 378,000

November purchase = 300,000*60% = 180,000

Credit purchase = 180,000*90% = 162,000

Payment to be made

January cash purchase = 120,000*10% =12,000

5% of January credit purchase = 108,000*5% =5,400

35% of December purchase = 378,000*35% = 132,300

60% of September purchase = 162,000*60% = 97,200

Total payment

= 12,000 + 5,400 + 132,300 + 97,200

= $246,900