2. [AICPA Adapted] Dewitt Co. budgeted its activity for October 2004 from the fo

Question

2. [AICPA Adapted] Dewitt Co. budgeted its activity for October 2004 from the following information:

Sales are budgeted at $750,000. All sales are credit sales and a provision for doubtful accounts is made monthly at the rate of 2 percent of sales.

Merchandise inventory was $120,000 at September 30, 2004, and an increase of $10,000 is planned for the month.

All merchandise is marked up to sell at invoice cost plus 50 percent.

Estimated cash disbursements for selling and administrative expenses for the month are $105,000.

Depreciation for the month is projected at $25,000.

Dewitt is projecting operating income for October 2004 in the amount of

a. $105,000. b. $119,000. c. $129,000. d. $230,000

the answer is A, but i'm not sure how they calculated the cost of goods sold (750/cost + .5Cost). Can someone work out the problem and show where they get each number and how they calculated it?

Explanation / Answer

The cost of goods sold has to be calculated

The sales is 750000 which is 50% over and above he cost of goods sold

Lets Cost be x, so sales wll be x+ 0.5 x

So, x+0.5x = 750000

so, 1.5x = 750000

so, cost of goods sold = 500000

Now, Operating income = Sales - cost of goods sold - admin expenses - depriciation - provision of bad debt

                                      =750000-500000 - 105000 - 25000 - (2% of 750000)   = 105000

That is the answer

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