Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 66

Purchases budget—analytical Gemstone, Ltd., is a retail jeweler. Most of the firm’s business is in jewelry and watches. The firm’s average gross profit ratio for jewelry and watches is 80% and 40%, respectively. The sales forecast for the next two months for each product category is as follows:

	Jewelry	Watches
September	$186,000	$90,000
October	144,000	76,500

The company’s policy, which is expected to be achieved at the end of August, is to have ending inventory equal to 120% of the next month’s cost of goods sold.

Required:

a. Calculate the cost of goods sold for jewelry and watches for September and October.

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b. Calculate a purchases budget, in dollars, for each product for the month of September.

Step 1 of 2

a.	Sales – Cost of goods sold = Gross profit, or Cost of goods sold = Sales * (1 - gross profit ratio) Jewelry: Cost of goods sold = Sales * (1 – 80%) = Sales * 20% Watches: Cost of goods sold = Sales * (1 – 40%) = Sales * 60%
	Sales:	Jewelry	Watches
	September	$186,000	$90,000
	October	144,000	76,500
	Cost of goods sold:
	September	$186,000 * 0.20 = $37,200	$90,000 * 0.60 = $54,000
	October	$144,000 * 0.20 = $28,800	$76,500 * 0.60 = $45,900