At the beginning of 2015, England Dresses has an inventory of $70,000. However,

Question

At the beginning of 2015, England Dresses has an inventory of $70,000. However, management wants to reduce the amount of inventory on hand to $40,000 at December 31. If net sales for 2015 are forecast at $180,000 and the gross profit rate is expected to be 18%, compute the cost of the merchandise which management should expect to purchase during 2015. (Hint: First compute the expected cost of goods sold.)

$187,600.

$117,600.

$147,600.

$110,000.

At the beginning of 2015, England Dresses has an inventory of $70,000. However, management wants to reduce the amount of inventory on hand to $40,000 at December 31. If net sales for 2015 are forecast at $180,000 and the gross profit rate is expected to be 18%, compute the cost of the merchandise which management should expect to purchase during 2015. (Hint: First compute the expected cost of goods sold.)

Explanation / Answer

Gross Profit = Net Sales x Gross Profit ratio

= $180,000 x 18%

= $ 32,400

Cost of goods sold

= Net Sales – Gross Profit

= $180,000 - $32,400

= $147,600

Cost of Goods sold = Opening stock + Purchases – Closing Stock

So, $147,600 = $70,000 + Purchases - $40,000

So, Purchases = $147,600 - $30,000

= $117,600

So, option B is the correct option

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