Answer (C) is correct . Purchases equal cost of goods sold, plus ending inventory, minus beginning inventory. Estimated cost of goods sold for February equals $260,000. Karmee's objective is to maintain a target inventory equal to 30% of the next month's sales in units. Since we do not have any unit sales information, we must work with data in dollars, instead. This means that beginning inventory in February is expected to be 30% of February's sales and February's ending inventory is expected to be 30% of March's sales. The cost of goods sold averages 40% of sales. The beginning inventory in February is $78,000 (30% × February sales of $650,000 × 40%), and the ending inventory in February is $84,000 (30% × March sales of $700,000 × 40%). The cost of sales is expected to be $260,000 in February (February sales of $650,000 × 40%). Now we can determine the cost of goods purchased using this formula: Beginning Inventory + Purchases ? Cost of Sales = Ending Inventory $78,000 + Purchases ? $260,000 = $84,000 Solving for Purchases, we get Purchases of $266,000.
Answer (A) is incorrect because The amount of $254,000 reverses the treatment of the change in inventory.
Answer (B) is incorrect because February COGS is $260,000.
Answer (D) is incorrect because The sum of COGS and beginning inventory equals $338,000.
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The purchase of merchandise that Karmee Company will need to make during February will be
