Question

Memphis Company's May sales budget calls for sales of $870,000. The store expects to begin May with $47,000 of inventory and to end the month with $52,000 of inventory. Gross margin is typically 40% of sales. Compute the budgeted cost of merchandise purchases for May.

Answer 1

Answer:

$527,000

Explanation:

The movement in the balance of inventory at the start and end of a period is as a result of sales and purchases. While sales reduces the balance in inventory, purchases increases the balance. This may be expressed mathematically as

Opening balance + purchases - cost of goods sold = closing balance

Gross margin is the difference between sales and cost of goods sold expressed as a percentage of sales.

Hence

Gross profit = 40% * $870,000

= $348,000

Cost of goods sold = $870,000 - $348,000

= $522,000

$47,000 + purchases - $522,000 = $52,000

Purchases = $52,000 + $522,000 - $47,000

= $527,000

Answer 2

Answer:

The budgeted cost of merchandise purchases is $527,000

Explanation:

The cost of merchandise purchases for May can be computed by first of all calculating the costs of goods sold,then by deducting closing inventory from costs of good sold and adding opening inventory,just like working backwards.

Sales                                              $870,000

less margin($870,000*40%)     ($348,000)

Cost of goods sold                       $522,000

Cost of goods sold =opening stock+purchases-closing stock

purchases=costs of goods sold+closing stock-opening stock

closing stock is $52000

opening stock is $47000

purchases =$522000+$52000-$47000

purchases= $527,000