Question

Lexi Company forecasts unit sales of 1,560,000 in April, 1,280,000 in May, 480,000 in June, and 1,590,000 in July. Beginning inventory on April 1 is 240,000 units, and the company wants to have 40% of next month’s sales in inventory at the end of each month. Prepare a merchandise purchases budget for the months of April, May, and June

Answer 1

April purchases are calculated as 1,680,000 units, May as 1,152,000 units, and June as 966,000 units, based on projected sales and desired ending inventory which is 40% of the next month's forecasted sales.

Step-by-step explanation:

The student is asked to prepare a merchandise purchases budget for Lexi Company for the months of April, May, and June. The budget must account for the forecasted sales and the desired ending inventory, which is set to be 40% of the next month's sales.

To calculate the required purchases, we use the following information:

• Desired ending inventory for each month (40% of the next month's forecasted sales).
• Beginning inventory for April.
• Projected sales for each month.

The formula for calculating purchases is:

Purchases = Projected Sales + Desired Ending Inventory - Beginning Inventory

For April:

Purchases = 1,560,000 units + (1,280,000 units * 40%) - 240,000 units = 1,680,000 units

For May:

Purchases = 1,280,000 units + (480,000 units * 40%) - (1,280,000 units * 40%) = 1,152,000 units

For June:

Purchases = 480,000 units + (1,590,000 units * 40%) - (480,000 units * 40%) = 966,000 units

The budgeting process is crucial in ensuring the company has enough inventory to meet the demand without holding excessive stock, which can tie up capital and increase storage costs.