Question

Requirement 1 what is the opportunity cost of interest forgone from purchasing all 216,000 units at the start of the year instead of in 12 monthly purchases of 18,000 units per order?

Grass Elsa manufacturer of mowers predict that it will purchase 16.000 spark plugs next year Case Caters estimate the 18,000 spark plugs will be requred each mom. Ale quotes a price of 1000 per park plug. The hors secount on 216.000 spark plugs are purchased the start of the year, a discount of 2% off the $1000 price will be given Grass Baters can invests cash at 10 per year to Greates place each purchase order Read the recent Lasten the con for the only cost of restorane by training the formula, the calculate the opportunity cost - Opportunity.com Resument 2. Wpony cool be recorded in the counting system? Why? recorded in the counting wstem, dont Requirements. She has 216.000 the start of the year or 10.000 each month how you can Aernative Purchase 215.000 spark plugs at beginning of year Alternative Purchase 11.000 spark plug af beginning of each month Difference mory The recent phong18.000 get the beginning of each more reasing2.000 beginning the

Answer 1

1.

Cost of unit for 18,000 Order	10.00
Cost of unit for 216,000 Order	9.80

216,000 units at start of year ((216000*9.8)/2)	1,058,400.00
18,000 units at start of each month. (18,000 x 10)/2	90,000.00
Difference in average Investment	968,400.00

Opportunity cost of interest forgone from 216,000 units at the start of year =968,400 x 10%

=96,840

2.

=

	Purchase 216,000 at start of year	Purchase 18,000 at start of every month
Annual purchase-order costs	280.00	3,360.00
Annual purchase (incremental) costs	2,116,800.00	2,160,000.00
Annual interest income that could be earnedif investment in inventory were invested(opportunity cost)	105,840.00	9,000.00
Relevant cost	2,222,920.00	2,172,360.00