Question

Dilly Farm Supply is located in a small town in the rural west. Data regarding the store's operations follow: Image.png Sales are budgeted at $290,000 for November, $310,000 for December, and $210,000 for January. Collections are expected to be 65% in the month of sale and 35% in the month following the sale. The cost of goods sold is 80% of sales. The company desires to have an ending merchandise inventory at the end of each month equal to 70% of the next month's cost of goods sold. Payment for merchandise is made in the month following the purchase. Other monthly expenses to be paid in cash are $21,100. Monthly depreciation is $21,000. Ignore taxes.

1. The cost of December merchandise purchases would be:

2.December cash disbursements for merchandise purchases would be:

Answer 1

Answer 1)

Calculation of cost of December Merchandise purchases

As per the company’s policy, 70% of the following month’s cost goods sold will be maintained in the ending inventory. Accordingly, 70% of the cost of goods sold in December must have been purchased and maintained in the ending inventory of November and balance 30% of the cost of goods sold in the month of December will be purchased in December.

Similarly, the company will have to maintain an ending inventory of 70% of the budgeted cost of goods sold of the month of January.

Particulars	Amount (In $)
30% of budgeted cost of goods of December ($ 248,000 X 30%)	74,400
70% of budgeted cost of goods of January ($ 168,000 X 70%)	117,600
Total cost of merchandise purchases in the month of December	192,000

Therefore total cost of merchandise purchases in the month of December is $ 192,000.

Answer 2)

Calculation of December cash disbursements for merchandise purchases.

As specified in the question, payment for purchases made in a month will be made in the immediately succeeding month. Accordingly, the payment for purchases made in the month of November will be made in December.

Since the total cost of merchandise purchases in the month of November is $ 243,200, the total cash disbursements in December for the merchandise purchases would also be $ 243,200.  

Working note:

Calculation of cost of November Merchandise purchases

Particulars	Amount (In $)
30% of budgeted cost of goods of November ($ 232,000 X 30%)	69,600
70% of budgeted cost of goods of December ($ 248,000 X 70%)	173,600
Total cost of merchandise purchases in the month of November	243,200