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Inventory

This topic has 1 reply, 2 voices, and was last updated 2 years ago by John Moffat.

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October 27, 2022 at 5:33 pm #670140
Sacca22
Participant
- Topics: 51
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A trader has budgeted sales for the coming year of $275. He achieves a constant mark-up of 25%. He plans to reduce his inventory level by $14 over the year.
What will his purchases for the year be?
I am unsure how the answer is 206.
If COGS was calculated to be 220.
COGS= opening + purchases – closing and if I plan on reducing inventory,
then shouldn’t it be:
220= purchases – 14?
Would appreciate your help figuring out the correct way to answer this question!
October 27, 2022 at 6:06 pm #670147
John Moffat
Keymaster
- Topics: 57
- Replies: 54483
The cost of sales this year is 100/125 x 275 = 220.
They are reducing the inventory by 14, and so 14 of the cost of sales is covered by the reduction in inventory.
The remainder (220 – 14 = 206) is the amount that they need to purchase this year.
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