BW's cost of goods sold is 60% of sales dollars. At the end of each month, BW wants a merchandise inventory balance equal to 25% of the following month's expected cost of goods sold. What dollar amount of merchandise inventory should BW plan to purchase in August?

Complete Question:

JT Department Store expects to generate the following sales for the next three months:

July 460,000 August: 580,000 September: 620,000

JT's cost of gods sold is 60% of sales dollars. At the end of each month, JT wants a merchandise inventory balance equal to 20% of the following month's expected cost of goods sold. What dollar amount of merchandise inventory should JT plan to purchase in August?

a. $257,400

b. $314,600

c. $352,800

d. $327,800

Option C. $352,800

Explanation:

The purchases of merchandise inventory in the month August can be calculated using the following formula:

Amount of merchandise inventory required =

Closing inventory required (Step1)  + Cost of goods sold (Step2) - Opening inventory (Step3)

Step1: Closing inventory required

The closing inventory required is 20% of the next month sales $620,000, which is $74,400.

Step2: Cost of goods sold

The cost of goods sold for the month is 60% of the current month sales $580,000 which means the 60% of it is $348,000.

Step3: Opening inventory

Closing inventory required for July                    $69,600

This is the amount that is required at the end of the July which is 20% of the sales $580,000 of the next month August which means the closing is $69,600. We also know that the closing of the previous month is opening for the next month. So the opening for the month of August is $69,600.

So by putting values, we have:

Amount of merchandise inventory required = $74,400 + $348,000 - $69,600 = $352,800

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