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The ending inventory each month is to be 15% of the next month's forecasted sales. The cost of the inventory sold (cost of goods sold) averages 60% of the selling price. Therefore, July's ending inventory is forecasted to be $650,000 (August sales) × .60 × .15, or $58,500. July's beginning inventory, which is the same as June's ending inventory, is forecasted to be $600,000 (July sales) × .60 × .15, or $54,000. The cost of the inventory sold during July is forecasted to be $600,000 (July sales) × .60, or $360,000. The basic inventory formula is Beginning Inventory + Purchases/Production ? Sold/Used = Ending Inventory. Thus, the formula to find Purchases for July is the following, letting P stand for Purchases: $54,000 + P ? $360,000 = $58,500. Solving for P, we get P = $364,500.
This is 60% of the July forecasted sales. This does not take into accounrt the change in the inventory level from the beginning of July to the end of July.
This answer results from reversing the beginning and ending inventory balances in calculating the purchases.
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