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17 November, 23:42

BW's cost of goods sold is 60% of sales dollars. At the end of each month, BW wants a merchandise inventory balance equal to 25% of the following month's expected cost of goods sold. What dollar amount of merchandise inventory should BW plan to purchase in August?

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  1. 17 November, 23:50
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    Complete Question:

    JT Department Store expects to generate the following sales for the next three months:

    July 460,000 August: 580,000 September: 620,000

    JT's cost of gods sold is 60% of sales dollars. At the end of each month, JT wants a merchandise inventory balance equal to 20% of the following month's expected cost of goods sold. What dollar amount of merchandise inventory should JT plan to purchase in August?

    a. $257,400

    b. $314,600

    c. $352,800

    d. $327,800

    Answer:

    Option C. $352,800

    Explanation:

    The purchases of merchandise inventory in the month August can be calculated using the following formula:

    Amount of merchandise inventory required =

    Closing inventory required (Step1) + Cost of goods sold (Step2) - Opening inventory (Step3)

    Step1: Closing inventory required

    The closing inventory required is 20% of the next month sales $620,000, which is $74,400.

    Step2: Cost of goods sold

    The cost of goods sold for the month is 60% of the current month sales $580,000 which means the 60% of it is $348,000.

    Step3: Opening inventory

    Closing inventory required for July $69,600

    This is the amount that is required at the end of the July which is 20% of the sales $580,000 of the next month August which means the closing is $69,600. We also know that the closing of the previous month is opening for the next month. So the opening for the month of August is $69,600.

    So by putting values, we have:

    Amount of merchandise inventory required = $74,400 + $348,000 - $69,600 = $352,800
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