Answer is $70,000. It's Wiley's error. This question is on CPAExcel and the answer is $70k
Johnson Co., distributor of candles, has reported the following budget assumptions for year 1: No change in candles inventory level; cash disbursement to candle manufacturer, $300,000; target accounts payable ending balance for year 1 is 150% of accounts payable beginning balance; and sales price is set at a markup of 20% of candle purchase price. The candle manufacturer is Johnson's only vendor, and all purchases are made on credit. The accounts payable has a balance of $100,000 at the beginning of year 1. What is the budgeted gross margin for year 1?
A. $60,000
B. $70,000
C. $75,000
D. $87,500
Answer is B
Gross Profit ($70,000) is determined by subtracting Cost of Goods Sold ($350,000) from Sales ($420,000). Sales is calculated by multiplying a markup of 20% based on cost of goods sold (i.e., $420,000 = 1.2($350,000). Cost of Goods Sold is easily determined by using an accounts payable T-account to calculate purchases of $350,000 by using the cash paid of $300,000 and the beginning and ending balances of accounts payable ($100,000 and $150,000, respectively).
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