Question

Shamrock Shades operates in mall kiosks throughout the southwestern United States. Shamrock purchases sunglasses from bulk discounters and sells the sunglasses in the mall kiosks. Shamrock is in the process of budgeting for the coming year and has projected sales of $360,000 for January, $440,000 for February, $600,000 for March, and $640,000 for April. Shamrock’s desired ending inventory is 55 percent of the following month’s cost of goods sold. Cost of goods sold is expected to be 45 percent of sales.

Required:

Compute the required purchases for each month of the first quarter (January, February and March).

Answer 1

Computation of Shamrock Shades purchases for first quarter is as follows:

Cost of goods sold = Beginning inventory + Purchases - Ending inventory

Thus,

Purchases= Cost of goods sold + Ending inventory- Beginning inventory

	January	February	March
Cost of goods sold	$       1,62,000	$       1,98,000	$       2,70,000
Add: Ending inventory	$       1,08,900	$       1,48,500	$       1,58,400
Less: Beginning inventory	$           89,100	$       1,08,900	$       1,48,500
Purchases	$       1,81,800	$       2,37,600	$       2,79,900

Working note:

1. Calculation of Cost of goods sold;

Cost of goods sold is expected to be 45 percent of sales.

	January	February	March	April
Sales	$       3,60,000	$       4,40,000	$       6,00,000	$ 6,40,000
Cost of goods sold (45% of sales )	$       1,62,000	$       1,98,000	$       2,70,000	$ 2,88,000

2. Calculation of Ending inventory:

Ending inventory is 55 % of the following month’s cost of goods sold

For December :

Ending inventory is 55% of cost of next month

means, Ending inventory of december is 55% of cost of goods sold of january month

Ending inventory of december = Cost of goods sold of january * 55%

Ending inventory of december = $ 1,62,000 * 55%

= $ 89,100

For January:

Ending inventory of january = Cost of goods sold of february * 55%

Ending inventory of january = $ 1,98,000 * 55%

= $ 1,08,900

For February:

Ending inventory of February = Cost of goods sold of March * 55%

Ending inventory of February = $ 2,70,000 * 55%

= $ 1,48,500

For March:

Ending inventory of March = Cost of goods sold of April * 55%

Ending inventory of March = $ 2,88,000 * 55%

= $ 1,58,400

3. Calculation of beginning inventory:

(a) Beginning invetory of January = Ending inventory of december

Ending inventory of december = $ 89,100 ( as calculated in WN 2)

Thus, Beginning invetory of january is $ 89,100

(b) Beginning invetory of february = Ending inventory of january

Ending inventory of january = $ 1,08,900 ( as calculated in WN 2)

Thus, Beginning invetory of February is $ 1,08,900

(c) Beginning invetory of march = Ending inventory of february

Ending inventory of february = $ 1,48,500 ( as calculated in WN 2)

Thus, Beginning invetory of march is $ 1,48,500