Question

If the desired ending inventory is 80% of the beginning inventory, and the cost of goods sold is $300,000, what will always be the value of purchases?

A) $150,000
B) $120,000
C) $60,000
D) $30,000

Answer 1

The question cannot be answered with certainty without additional information about the beginning inventory. The purchases would be the cost of goods sold minus 20% of the beginning inventory. Thus, none of the provided options can be determined as always correct.

Step-by-step explanation:

If the desired ending inventory is 80% of the beginning inventory, and the cost of goods sold is $300,000, we need to make use of the inventory equation which is:

Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold (COGS)

Let's assign variables to unknown values:

• Let B be the value of Beginning Inventory
• Since desired Ending Inventory is 80% of Beginning Inventory, Ending Inventory = 0.8B
• Let P be the value of Purchases

Now, the equation becomes:

B + P - 0.8B = $300,000

This simplifies to:

0.2B + P = $300,000

Because Ending Inventory is 80% of Beginning Inventory, it follows that P = COGS - 0.2B

Due to the absence of exact values for B and P, we cannot determine the specific value of Purchases. However, the relationship is clear: Purchases will be the Cost of Goods Sold minus 20% of the Beginning Inventory. None of the provided options, A) $150,000, B) $120,000, C) $60,000, D) $30,000, can be said to always be the value of purchases, as that value will change depending on the Beginning Inventory.