Question

Answer the following questions using the information below:

Wallace Company provides the following data for next year:

Month Budgeted Sales
January $120,000
February 108,000
March 132,000
April 144,000

The gross profit rate is 35% of sales. Inventory at the end of December is $21,600 and target ending inventory levels are 20% of next month's sales, stated at cost.

*45) What is the amount of purchases budgeted for January?*
A) $63,960
B) $70,440
C) $78,000
D) $92,040

Answer 1

The budgeted purchases for January are calculated by adding the cost of goods sold for January to the target ending inventory for January and subtracting the beginning inventory. With a COGS of 65% of sales, the calculation results in $70,440, making choice B) the correct answer.

Step-by-step explanation:

To calculate the amount of purchases budgeted for January, we first need to determine the cost of goods sold (COGS) and the desired ending inventory. The gross profit rate is 35% of sales, which implies that the COGS is 65% of sales (100% - 35%). For January's sales of $120,000, the COGS is $120,000 * 65% = $78,000.

The target ending inventory for January is 20% of February's sales, stated at cost. February's sales are $108,000, so the target ending inventory is $108,000 * 20% * 65% = $14,040 (since inventory is at cost, we use the 65% COGS rate).

The budgeted purchases for January is the sum of COGS for January plus the desired ending inventory for January minus the beginning inventory. The beginning inventory for January is the inventory at the end of December which is $21,600.

Budgeted Purchases for January = COGS for January + Ending Inventory for January - Beginning Inventory for January

Budgeted Purchases for January = $78,000 + $14,040 - $21,600 = $70,440.

Thus, the correct answer is B) $70,440.