Answer (B) is correct . The first step is to determine the cost of goods sold for each month. Since sales are 130% of cost, cost of goods sold can be calculated as follows: July: $715,000 ¡Â 130% = $550,000 ? August: 728,000 ¡Â 130% = 560,000 September: 624,000 ¡Â 130% = 480,000 Purchases for August can now be calculated as follows: Projected sales at cost $560,000 Add:? required ending inventory ($480,000 ¡Á 25%) 120,000 Total goods needed $680,000 Less:? beginning inventory (140,000) Purchases $540,000
Answer (A) is incorrect because The amount of $509,600 results from treating gross profit as 30% of sales rather than as 30% of cost.
Answer (C) is incorrect because The amount of $560,000 results from failing to consider the changes in inventories.
Answer (D) is incorrect because The amount of $680,000 results from failing to subtract beginning inventory.
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