Question

It is November 1 of Year 1. Sales for Corbin Company for November and December of Year 1 and January of Year 2 are forecasted to be as follows: November, 400,000; December 600,000; January, 200,000 On average, cost of goods sold is 70% of sales. During this period, Corbin Company expects inventory levels to remain constant. This means that inventory purchases are expected to equal the amount of cost of goods sold. 40% of purchases are for cash. Of the credit purchases, 5% are paid during the month of the purchase, 65% in the month following the purchase, and 30% in the second month following the purchase. Sales for September and October of Year 1 were 100,000 and 150,000, respectively. What is the forecasted amount of total cash payments for November of Year 1

Answer 1

Answer: $173,950

Step-by-step explanation:

As this is for November, the relevant months will be September, October and November.

30% of credit sales are paid in the second month following the purchase.

65% are paid in the month following it

5% are paid in the same month.

For November therefore, the cash payments will be;

= 30% of September + 65% of October + 5% of November

September

Purchases = 70% * 100,000 = $70,000

Credit Purchases = 60% * 70,000 = $42,000

October

Purchases = 150,000 * 70% = $105,000

Credit Purchases = 105,000 * 60% = $63,000

November

Purchases = 400,000 * 70% =$280,000

Credit Purchases = 280,000 * 60% = $168,000

Cash Payments in November for credit purchases = (30% * 42,000) + (65% * 63,000) + (5% * 168,000)

= $‭61,950‬

Remember that 40% of purchases in a month are paid for in cash. The total cash payment for November is;

Total cash payments in November = Cash payment for credit purchases + Cash payment for purchases bought in cash in November

= 61,950 + ( 40% * 280,000)

= $173,950