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Cost of goods sold figures are used in calculating the amount of purchases. Cost of goods sold are 65% of sales for each month, since the company maintains a 35% gross profit margin (100% ? 35% = 65%). COGS for October is therefore 65% of $42,000, or $27,300. COGS for November is 65% of $58,000, or $37,700. And COGS for December is 65% of $74,000, or $48,100. The company carries an ending inventory balance each month that is sufficient to support 30% of the next month's expected sales (that is, 30% of the COGS of the next month's expected sales, which is 65% of the next month's expected sales). Therefore, the ending inventory balance at the end of October will be 30% of November's COGS of $37,700, or $11,310. This will also be the beginning inventory balance for the month of November. The ending inventory balance for November will be 30% of December's COGS of $48,100, or $14,430. The basic inventory formula is Beginning Inventory + Purchases ? Cost of Goods Sold = Ending Inventory. We know beginning inventory for November ($11,310), COGS for November ($37,700) and ending inventory for November ($14,430), so we can calculate the Purchases for November. Letting P stand for Purchases, the formula is: $11,310 + P ? $37,700 = $14,430 Solving for P, we get P = $40,820.
This answer results from using December's planned Cost of Goods Sold to calculate November's planned purchases. November's Cost of Goods Sold should be used in calculating November's purchases.
This answer results from using the amount of sales dollars to calculate the amount of purchase dollars needed during the month. The sales dollar amount includes profit, as well as the cost of the sales. Only the cost of the sales is used when calculating the amount of purchases to be made and anything else having to do with inventory. Each sales amount should be reduced to the cost of the sales, which is 65% of the sales amount because the company maintains a 35% gross profit margin.
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