Memphis Company's May sales budget calls for sales of $870,000. The store expects to begin May with $47,000 of inventory and to end the month with $52,000 of inventory. Gross margin is typically 40% of sales. Compute the budgeted cost of merchandise purchases for May.

$527,000

Explanation:

The movement in the balance of inventory at the start and end of a period is as a result of sales and purchases. While sales reduces the balance in inventory, purchases increases the balance. This may be expressed mathematically as

Opening balance + purchases - cost of goods sold = closing balance

Gross margin is the difference between sales and cost of goods sold expressed as a percentage of sales.

Hence

Gross profit = 40% * $870,000

= $348,000

Cost of goods sold = $870,000 - $348,000

= $522,000

$47,000 + purchases - $522,000 = $52,000

Purchases = $52,000 + $522,000 - $47,000

= $527,000

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