Final answer:
The budgeted cash payments for purchases in January are $65,000.
Therefore, the correct answer is D) $65,000.
Step-by-step explanation:
To determine the budgeted cash payments for purchases for Casey Corporation in January, we must first calculate the cost of goods sold (COGS) and the required inventory purchases.
Find COGS for January:
Since the gross margin is 30% of sales, COGS is 70% (100% - 30%) of sales.
COGS for January = 70% x $200,000
COGS for January = $140,000.
Calculate desired ending inventory for January:
February's COGS is 70% of February's sales.
Desired ending inventory = 20% of February's
COGS for February = 20% x (70% x $100,000)
COGS for February = 20% x $70,000
COGS for February = $14,000.
Determine total inventory needed for January:
This includes January's COGS plus desired ending inventory.
Total inventory needed = $140,000 (January COGS) + $14,000 (desired ending inventory)
Total inventory needed = $154,000.
Subtract beginning inventory from the total inventory needed to find the required inventory purchases.
Required inventory purchases = Total inventory needed - Beginning inventory
Required inventory purchases = $154,000 - $14,000
Required inventory purchases = $140,000.
Since purchases are paid in full the following month, the budgeted cash payments for January will be for December's purchases, which equals beginning accounts payable. Thus, the budgeted cash payments for purchases in January is $65,000, which corresponds to option D.
Complete question:
The following information pertains to the January operating budget for Casey Corporation.
- Budgeted sales for January $200,000 and February $100,000.
- Collections for sales are 60% in the month of sale and 40% the next month.
- Gross margin is 30% of sales.
- Administrative costs are $10,000 each month.
- Beginning inventory is $14,000
- Beginning accounts payable is $65,000. (All from inventory purchases.)
- Purchases are paid in full the following month.
- Desired ending inventory is 20% of next month's cost of goods sold (COGS).
For January, budgeted cash payments for purchases are
A) $50,000
B) $70,000
C) $100,000
D) $65,000