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A company plans to purchase inventory for the second half of 2014 as follows:July $100,000August $75,000September $225,000October $125,000November $250,000December $30,000They usually pay 50% of inventory purchases in the month of purchase, 35% in the following month, and 15% in the second month.Based on this information, what are the forecasted total 2014 cash payments for inventory purchased in the second half of 2014? $705,000 $752,500 $790,000 $805,000

Question

A company plans to purchase inventory for the second half of 2014 as follows:July 100,000August100,000August 75,000September 225,000October225,000October 125,000November 250,000December250,000December 30,000They usually pay 50% of inventory purchases in the month of purchase, 35% in the following month, and 15% in the second month.Based on this information, what are the forecasted total 2014 cash payments for inventory purchased in the second half of 2014? 705,000705,000 752,500 790,000790,000 805,000

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Solution

To calculate the total cash payments for inventory purchased in the second half of 2014, we need to consider the payment schedule of the company.

Here's how to calculate it:

  1. Payments in the month of purchase: This is 50% of the total inventory purchased each month.

July: 100,000∗0.50=100,000 * 0.50 = 50,000 August: 75,000∗0.50=75,000 * 0.50 = 37,500 September: 225,000∗0.50=225,000 * 0.50 = 112,500 October: 125,000∗0.50=125,000 * 0.50 = 62,500 November: 250,000∗0.50=250,000 * 0.50 = 125,000 December: 30,000∗0.50=30,000 * 0.50 = 15,000

  1. Payments in the following month: This is 35% of the total inventory purchased in the previous month.

August (for July purchases): 100,000∗0.35=100,000 * 0.35 = 35,000 September (for August purchases): 75,000∗0.35=75,000 * 0.35 = 26,250 October (for September purchases): 225,000∗0.35=225,000 * 0.35 = 78,750 November (for October purchases): 125,000∗0.35=125,000 * 0.35 = 43,750 December (for November purchases): 250,000∗0.35=250,000 * 0.35 = 87,500

  1. Payments in the second month after purchase: This is 15% of the total inventory purchased two months ago.

September (for July purchases): 100,000∗0.15=100,000 * 0.15 = 15,000 October (for August purchases): 75,000∗0.15=75,000 * 0.15 = 11,250 November (for September purchases): 225,000∗0.15=225,000 * 0.15 = 33,750 December (for October purchases): 125,000∗0.15=125,000 * 0.15 = 18,750

Now, add up all these amounts to get the total cash payments for inventory in 2014:

50,000+50,000 + 37,500 + 112,500+112,500 + 62,500 + 125,000+125,000 + 15,000 + 35,000+35,000 + 26,250 + 78,750+78,750 + 43,750 + 87,500+87,500 + 15,000 + 11,250+11,250 + 33,750 + 18,750=18,750 = 805,000

So, the forecasted total 2014 cash payments for inventory purchased in the second half of 2014 is $805,000.

This problem has been solved

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