Question

Heart & Soul expects to sell 20,00 CDs in the first 4 months of 20X1. Each CD sells for $12 and costs $8. Operating budget for Q1 are projected as follows:

20X1	January	February	March	April
Expected sales (in Units)	2,500	4,000	7,500	6,000

a)    Prepare a monthly sales forecast in dollars for Q1 (January, February and March)

b)    Prepare a monthly contribution margin statement for Q1

Assuming that Heart & Soul ending inventory is projected to be 80% of next month sales. Company started 20X1 with 2,000 CDs in inventory.

c)    How many CDs does the company need to buy each month of Q1?

d)    What is the cost of inventory purchases for each month?

Answer 1

Monthly Sales Forecast (in $) = Expected Sales * Selling Price

	January	February	March
Monthly Sales Forecast (in $)	30000	48000	90000

Monthly Contribution Margin = Monthly Sales Forecast (in $) – Variable costs

Contribution Margin (%) = (Contribution Margin/Monthly Sales Forecast (in $)) * 100

	January	February	March
Monthly Sales Forecast	30000	48000	90000
Variable Cost	20000	32000	60000
Contribution Margin	10000	16000	30000
Contribution Margin (%)	33.33%	33.33%	33.33%

CDs the company need to buy each month = Closing Balance for the month + Monthly Sales – Opening Balance for the month

Opening Balance for January is given in the question as 2000

Closing balance of each month can be calculated as 80% of expected sales of next month

	January	February	March
Monthly Sales Forecast	30000	48000	90000
Opening Inventory	2000	3200	6000
Closing Inventory	3200	6000	4800
CDs company need to buy	3700	6800	6300

Cost of Inventory Purchased = CDs company need to buy * cost of each CD

	January	February	March
CDs company need to buy	3700	6800	6300
Cost of each CD	8	8	8
Cost of Inventory Purchased	29600	54400	50400