Sun Industries' budgeted sales and direct materials purchases are as follows: Budgeted Sales Budgeted DM Purchases January $200,000 $30,000 February $220,000 $36,000 March $250,000 $38,000 Sales are 30% cash and 70% credit. Credit sales are collected in the month following sale. Direct materials purchases are paid 40% cash in the month of purchase and 60% in the month following purchase. What are budgeted cash payments for DM purchases for the month of February ?

Total cash payments in February : $32400

Explanation:

Purchases on cash are generally collected immediately, hence if the purchase occurs in February, it would be collected in February itself. Purchases on credit on the other hand, is where the debtor can pay for the goods or services on a later date. In this case, part is paid at the time of purchase and another part is paid in the next month after the sale.

According to the information, in February $36,000 worth of purchase were made. Of this, 40% would be paid in February itself. 60% in March. At the same time, the business would also have to pay for the remainder of the $30,000 of purchases made in January in February. Hence, total cash payments in February are:

$36000 x 40% = $14400

$30000 x 60% = $18000

Total cash payments in February: $14400 + $18000 = $32400