Question

Citrus Girl Company (CGC) purchases quality citrus produce from local growers and sells the produce via the Internet across the United States. To keep costs down, CGC maintains a warehouse, but no showroom or retail sales outlets. CGC has the following information for the second quarter of the year:

1. Expected monthly sales for April, May, June, and July are $220,000, $190,000, $310,000, and $90,000, respectively.

2. Cost of goods sold is 30 percent of expected sales.

3. CGC’s desired ending inventory is 20 percent of the following month’s cost of goods sold.

4. Monthly operating expenses are estimated to be:

Salaries: $30,000.

Delivery expense: 4 percent of monthly sales.

Rent expense on the warehouse: $4,500.

Utilities: $800.

Insurance: $175.

Other expenses: $260.

Required:

1. Compute the budgeted cost of purchases for each month in the second quarter.

2. Complete the budgeted income statement for each month in the second quarter.

Answer 1

Solution:

	April	May	June	July
Sales	$220,000	$190,000	$310,000	$90,000
Cost of sales,30% of sales	$66,000($220,000 × 30%)	$57,000($190,000 ×30%)	$93,000($310,000 × 30%)	$27,000($90,000 × 30%)
Desired ending inventory (20% of following month cost of goods sold)	$11,400($57,000 × 20%)	$18,600($93,000 × 20%)	$5,400($27,000 ×20%)
Total inventory needs	$77,400	$75,600	$98,400
Less: Beginning inventory	-$13,200($66,000 × 20%)	-$11,400	-$18,600
Budgeted Purchases	$64,200	$64,200	$79,800

2.)

Particulars	April	May	June
Revenue from sales	$220,000	$190,000	$310,000
Less: COGS	- $66,000	-$57,000	-$93,000
Gross margin	$154,000	$133,000	$217,000
Less: monthly operating expenses:
Salaries	$30,000	$30,000	$30,000
Delivery expenses (4% of sales)	$8,800($220,000 × 4%)	$7,600($190,000 × 4%)	$12,400($310,000 × 0.04)
Rent of warehouse	$4,500	$4,500	$4,500
Utilities	$800	$800	$800
Insurance	$175	$175	$175
Other expenses	$260	$260	$260
Total operating expenses	-$44,535	-$43,335	-$48,135
Net income	$109,465	$89,665	$168,865

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