Chapter 14, Problem 10E

Exercise 7-10A Preparing inventory purchases budgets with different assumptions

Executive officers of Stoneham Company are wrestling with their budget for the next year. The following are two different sales estimates provided by two difference sources:

  Stoneham’s past experience indicates that cost of goods sold is about 60 percent of sales revenue. The company tries to maintain 10 percent of the next quarter’s expected cost of goods sold as the current quarter’s ending inventory. This year’s ending inventory is $15,000. Next year’s ending inventory is budgeted to be $18,000.

Required

a.    Prepare an inventory purchases budget using the sales manager’s estimate.

b.    Prepare an inventory purchases budget using the marketing consultant’s estimate.