Problem:
All sales at Meeks Company, a wholesaler, are made on credit. Experience has shown that 70% of the accounts receivable are collected in the month of the sale, 26% are collected in the month following the sale, and the remaining 4% are uncollectible. Actual sales for March and budgeted sales for the following four months are given below:
March (actual sales) $200,000
April $300,000
May $500,000
June $700,000
July $400,000
The company's cost of goods sold is equal to 60% of sales. All purchases of inventory are made on credit. Meeks Company pays for one half of a month's purchases in the month of purchase, and the other half in the month following purchase. The company requires that end-of-month inventories be equal to 25% of the cost of goods sold for the next month.
Required to do:
Q1. Compute the amount of cash, in total, which the company can expect to collect in May.
Q2. Compute the budgeted dollar amount of inventory which the company should have on hand at the end of April.
Q3. Compute the amount of inventory that the company should purchase during the months of May and June.
Q4. Compute the amount of cash payments that will be made to suppliers during June for purchases of inventory.