Ever Lawn, a manufacturer of lawn mowers, predicts that it will purchase 324,000 spark plugs next year. Ever Lawn estimates that 27,000 spark plugs will be required each month. A supplier quotes a price of $13 per spark plug. The supplier also offers a special discount option: If all 324,000 spark plugs are purchased at the start of the year, a discount of 2% off the $13 price will be given. Ever Lawn can invest its cash at 8% per year. It costs Ever Lawn $130 to place each purchase order. Required 1. What is the opportunity cost of interest forgone from purchasing all 324,000 units at the start of the year instead of in 12 monthly purchases of 27,000 units per order? 2. Would this opportunity cost be recorded in the accounting system? Why? 3. Should Ever Lawn purchase 324,000 units at the start of the year or 27,000 units each month? Show your calculations. 1 Requirement 1. What is the opportunity cost of interest forgone from purchasing all 324,000 units at the start of the year instead of in 12 monthly purchases of 27,000 units per order? Let's begin the calculation for the opportunity cost of interest forgone by first determining the formula. Then, calculate the opportunity cost. Difference in average investment X Investment percentage = Opportunity cost X
Ever Lawn, a manufacturer of lawn mowers, predicts that it will purchase 324,000 spark plugs next year. Ever Lawn estimates that 27,000 spark plugs will be required each month. A supplier quotes a price of $13 per spark plug. The supplier also offers a special discount option: If all 324,000 spark plugs are purchased at the start of the year, a discount of 2% off the $13 price will be given. Ever Lawn can invest its cash at 8% per year. It costs Ever Lawn $130 to place each purchase order. Required 1. What is the opportunity cost of interest forgone from purchasing all 324,000 units at the start of the year instead of in 12 monthly purchases of 27,000 units per order? 2. Would this opportunity cost be recorded in the accounting system? Why? 3. Should Ever Lawn purchase 324,000 units at the start of the year or 27,000 units each month? Show your calculations. 1 Requirement 1. What is the opportunity cost of interest forgone from purchasing all 324,000 units at the start of the year instead of in 12 monthly purchases of 27,000 units per order? Let's begin the calculation for the opportunity cost of interest forgone by first determining the formula. Then, calculate the opportunity cost. Difference in average investment X Investment percentage = Opportunity cost X
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Ever Lawn, a manufacturer of lawn mowers, predicts that it will purchase 324,000 spark plugs next year. Ever Lawn estimates that 27,000 spark plugs will be required each month. A
supplier quotes a price of $13 per spark plug. The supplier also offers a special discount option: If all 324,000 spark plugs are purchased at the start of the year, a discount of 2% off
the $13 price will be given. Ever Lawn can invest its cash at 8% per year. It costs Ever Lawn $130 to place each purchase order.
Required
1. What is the opportunity cost of interest forgone from purchasing all 324,000 units at the start of the year instead of in 12 monthly purchases of 27,000 units per order?
2. Would this opportunity cost be recorded in the accounting system? Why?
3. Should Ever Lawn purchase 324,000 units at the start of the year or 27,000 units each month? Show your calculations.
Requirement 1. What is the opportunity cost of interest forgone from purchasing all 324,000 units at the start of the year instead of in 12 monthly purchases of 27,000 units per order?
Let's begin the calculation for the opportunity cost of interest forgone by first determining the formula. Then, calculate the opportunity cost.
X
Difference in average investment
X
Investment percentage
=
Opportunity cost
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