Chapter 6, Problem 6.76BP

LO 5

(Learning Objective 5: Use the COGS model to make management decisions, and estimate amount of inventory to purchase) Eddie’s Convenience Stores’ income statement for the year ended December 31, 2017, and its balance sheet as of December 31, 2017, are as follows:

	A	B
1	Eddie’s Convenience Stores Income Statement Year Ended December 31, 2017
2	Sales	$ 958,000
3.	Cost of sales	717,000
A	Gross profit	241,000
5	Operating expenses	108,000
6	Net income	$ 133,000
7

 The business is organized as a proprietorship so it pays no corporate income tax. The owner is budgeting for 2018 and expects sales and cost of goods sold to increase by 9%. To meet customer demand, ending inventory will need to be $84,000 at December 31, 2018. The owner hopes to earn a net income of $156,000 next year.

Requirements

  1.    One of the most important decisions a manager makes is the amount of inventory to purchase. Show how to determine the amount of inventory to purchase in 2018.

  2.    Prepare the store’s budgeted income statement for 2018 to reach the target net income of $156,000. To reach this goal, operating expenses must decrease by $1,310.