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O’Hare Company is in the process of preparing a purchases budget for the first quarter of Year 2. The company has budgeted sales as follows: Dec. Year 1 $ 44,000 Jan. Year 2 $ 46,500 Feb. Year 2 $ 51,000 Mar. Year 2 $ 61,500 Cost of goods sold is expected to be 75% of sales. The company would like to have ending inventory each month equal to 25% of the following month's predicted cost of sales. The total cost of purchases in January Year 2 is:

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Answer:

Cost of goods sold in January year 2 = 75% x $46,500 = $34,875

Cost of goods sold in February year 2 = 75% x $51,000 = $38,250

Ending inventory in December year 1 = 25% x $34,875 = $8,718.75

Ending inventory in January year 2 = 25% x $38,250 = $9,562.50

Cost of purchases in January year 2 will be:

Cost of purchases = Cost of goods sold + Closing inventory – Opening inventory

Cost of purchases =     $34,875  + $9,562.50 - $8,718.75

Cost of purchases = $35,718.75                                                                                                                                                                

Explanation: This question relates to the computation of cost of purchases.  Cost of goods sold is 75% of sales  while the ending inventory is  25% of the next month's cost of sales. The ending inventory in a month is the beginning inventory of another month. For instance, the              ending inventory in December year 1 becomes the beginning inventory in January year 2                                                                                                                                                                                                                          

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