Question

Spelling Company has the following sales projection (in units) for the next six months:
Feb: 19000
Mar: 21000
Apr: 17000
May: 24000
Jun: 20000
Jul: 15000

Each unit sells for $50.

Spelling has prepared the following sales budget for the quarter of April, May and June:

Sales Budget
	April	May	June	Total
Sales in units	17000	24000	20000	61000
Selling price per unit	x $50	x $50	x $50
Sales revenue	$850000	$1200000	$1000000	$3050000

Spelling's cost of goods sold is 60% of its sales revenue. The company has a policy that it keeps 10% of next months budgeted cost of goods sold as ending inventory. The company had exactly the budgeted amount of inventory on hand at April 1.


What is the cost of inventory at April 1 (Beginning inventory)  

What is the budgeted cost of purchases in June?  

What is the desired cost of inventory at the end of the quarter?

Answer 1

Cost of goods sold in April = $850,000 * 60% = $510,000

Cost of inventory at April 1 = 10% of April cost of goods sold

= $510,000 * 10%

= $51,000

Budgeted cost of purchases in June = June cost of goods sold + Ending inventory - Beginning inventory

= ($1,000,000 * 60%) + (15,000 * $50 * 60% * 10%) - ($1,000,000 * 60% * 10%)

= $600,000 + $45,000 - $60,000

= $585,000

Desired cost of inventory at the end of the quarter = July cost of goods sold * 10%

= 15,000 * $50 * 60% * 10%

= $45,000