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alisha [4.7K]
2 years ago
13

Lumpkin Company sells lamps and other lighting fixtures. The purchasing department manager prepared the following inventory purc

hases budget. Lumpkin’s policy is to maintain an ending inventory balance equal to 10 percent of the following month’s cost of goods sold. April’s budgeted cost of goods sold is $40,000. Required Complete the inventory purchases budget by filling in the missing amounts.
Business
1 answer:
KATRIN_1 [288]2 years ago
8 0

Answer:

<u>February.</u>

Desired ending inventory = 10% of March Cost of goods(COGS):

= 10% * 35,000

= $3,500

Inventory needed = COGS + ending inventory

= 32,000 + 3,500

= $35,500

Beginning inventory = January ending inventory = $3,200

Required Purchases = Inventory needed - Beginning inventory

= 35,500 - 3,200

= $32,300

<u>March</u>

Desired ending inventory = 10% of April COGS:

= 10% * 40,000

= $4,000

Inventory needed:

= 35,000 + 4,000

= $39,000

Beginning inventory = February ending inventory = $3,500

Required purchases:

= 39,000 - 3,500

= $35,500

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a. I would consider consider leasing since the profits gained from leasing ($216,978,355.60) is greater compared to the profits if a spot rate is considered ($214,676,191.10) in 4 years.

b. I would consider consider leasing since the value gained from leasing ($123,553,875.20) is greater compared to the value if a spot rate is considered ($120,982,986.80) in 2 years.  

Explanation:

a. Determine best option

<em>Step 1: Determine total revenue per year if they meet the demand.</em>

Total revenue per year=revenue per chair×number of chairs per year

where;

revenue per chair=Rs.20,000

number of chairs per year=4,000 units

replacing;

Total revenue per year=(20,000×4,000)=$80,000,000

<em>Step 2: Determine the net revenue per year for Leasing</em>

Net revenue=total revenue-total cost for leasing

total cost for leasing=cost per chair per square feet×area per chair×number of chairs

where;

cost per chair per square feet=10,000/100=$100

area per chair=10 square feet

number of chairs=4,000

replacing;

total cost for leasing=100×10×4,000=$4,000,000

Net revenue=80,000,000-4,000,000=76,000,000 per year

<em>Step 3: Determine the present value of the net revenue per year for Leasing</em>

Year       Future cash flow            Present cash flow                 Amount

 1            76,000,000               76,000,000/{(1+0.15)^1}         66,086,956.52

 2           76,000,000               76,000,000/{(1+0.15)^2}         57,466,918.71

 3           76,000,000               76,000,000/{(1+0.15)^3}         49,971,233.66

 4           76,000,000               76,000,000/{(1+0.15)^4}         43,453,246.67

Total present value of the future net revenue for leasing=(66,086,956.52+57,466,918.71+49,971,233.66+43,453,246.67)=

$216,978,355.60

<em>Step 3: Determine the present value for the cost for spot Market rate</em>

Since the spot market rate is paid once;

Total cost=(15,000/100)×10×4,000=$6,000,000

Total cost in four years=6,000,000×4=$24,000,000

Present value of spot rate cost=24,000,000/{(1+0.15)^4}=$13,722,077.89

<em>Step 4: Determine the present value of the revenue per year </em>

Year       Future cash flow            Present cash flow                 Amount

 1            80,000,000               80,000,000/{(1+0.15)^1}         69,565,217.39

 2           80,000,000               80,000,000/{(1+0.15)^2}         60,491,493.38

 3           80,000,000               80,000,000/{(1+0.15)^3}         52,601,298.59

 4           80,000,000               80,000,000/{(1+0.15)^4}         45,740,259.65

Present value of Total revenue=69,565,217.39+60,491,493.38+52,601,298.59+45,740,259.65=

$228,398,269

<em>Step 5: Determine the present value of the net revenue per year for sport rate</em>

Net present value=(228,398,269-13,722,077.89)=$214,676,191.10

I would consider consider leasing since the profits gained from leasing ($216,978,355.60) is greater compared to the profits if a spot rate is considered ($214,676,191.10).

b.

<em>Step 6: Consider NPV for 2 years if they Lease</em>

Year       Future cash flow            Present cash flow                 Amount

 1            76,000,000               76,000,000/{(1+0.15)^1}         66,086,956.52

 2           76,000,000               76,000,000/{(1+0.15)^2}         57,466,918.71

Net present value=(66,086,956.52+57,466,918.71)=$123,553,875.20

<em>Step 7: Consider total revenue if the use a spot rate</em>

Year       Future cash flow            Present cash flow                 Amount

 1            80,000,000               80,000,000/{(1+0.15)^1}         69,565,217.39

 2           80,000,000               80,000,000/{(1+0.15)^2}         60,491,493.38

Total revenue=(69,565,217.39+60,491,493.38)=$130,056,710.80

<em>Step 7: Consider cost for 2 years if they use a spot rate</em>

Total cost=6,000,000×2=$12,000,000

Present value=12,000,000/{(1+0.15)^2}=$9,073,724.008

Net present value=130,056,710.80-9,073,724.008=$120,982,986.80

I would consider consider leasing since the value gained from leasing ($123,553,875.20) is greater compared to the value if a spot rate is considered ($120,982,986.80) in 2 years.

6 0
3 years ago
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