Question

In the current year, actual May sales revenue totaled $500,000 and the cost of these sales was $100,000. June sales are expected to increase by 15% over the sales of May, and July sales are expected to grow by 20% over the sales of June. August sales are anticipated to be $450,000. Prices are set to achieve a 55% gross profit. The company wants to maintain a safety stock in their ending inventory equal to 30% of next month's cost of sales. The ending inventory requirement was met at the end of May. Accounts payable consist solely of inventory purchases. Purchases from suppliers carry payment terms of net 30. What are Fraser's Ridge's expected cash disbursements in August?

Answer 1

Fraser's Ridge's expected cash disbursements in August can be calculated based on the projected sales and costs for June, July, and August.

Step-by-step explanation:

To calculate Fraser's Ridge's expected cash disbursements in August, we need to consider several factors. First, we know that June sales are expected to increase by 15% over the sales in May, so June sales would be $575,000 ($500,000 * 1.15). Next, July sales are anticipated to grow by 20% over June sales, so July sales would be $690,000 ($575,000 * 1.20).

Now, to calculate the cost of sales for June, we can use the gross profit percentage of 55%. The cost of sales for June would be $275,000 ($575,000 * (1 - 0.55)). Similarly, the cost of sales for July would be $345,000 ($690,000 * (1 - 0.55)).

Since the company wants to maintain a safety stock in their ending inventory equal to 30% of next month's cost of sales, the safety stock for July would be $103,500 ($345,000 * 0.30). Therefore, the expected cash disbursements in August would be the cost of sales for August ($450,000) plus the safety stock for July ($103,50).