Karmee Company has been accumulating operating data in order to prepare an annual profit plan. Details regarding Karmee's sales for the first six months of the coming year are as follows.
Estimated Monthly Sales Type of Monthly Sale
January $600,000 Cash sales 20%
February 650,000 Credit sales 80%
March 700,000
April 625,000
May 720,000
June 800,000
Collection Pattern for Credit Sales
Month of sale 30%
One month following sale 40%
Second month following sale 25%
Karmee's cost of goods sold average 40 percent of the sales value. Karmee's objective is to maintain a target inventory equal to 30 percent of the next month's sales. Purchases of merchandise for resale are paid for in the month following the sale. The variable operating expenses (other than cost of goods sold) for Karmee are 10 percent of sales and are paid for in the month following the sale. The annual fixed operating expenses are presented below. All of these are incurred uniformly throughout the year and paid monthly except for insurance and property taxes. Insurance is paid quarterly in
January, April, July, and October. Property taxes are paid twice a year in April and October.
Annual Fixed Operating Costs
Advertising $720,000
Depreciation 420,000
Insurance 180,000
Property taxes 240,000
Salaries 1,080,000
The purchases of merchandise that Karmee Company will need to make during February will be:
a. $266,000
b. $254,000
c. $275,000
d. $260,000
I got C but the answer is A. The beginning inventory they multiplied the 650,000 X 40% X 30% = 78,000 why would you multiply the 40%
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