Inventory decision, opportunity costs. Lawnox, a manufacturer of lawn mowers, predicts that it will purchase 240,000 spark plugs next year. Lawnox estimates that 20,000 spark plugs will be required each month. A supplier quotes a price of $9 per spark plug. The supplier also offers a special discount option: If all 240,000 spark plugs are purchased at the start of the year, a discount of 4% off the $9 price will be given. Lawnox can invest its cash at 10% per year. It costs Lawnox $200 to place each purchase order.
REQUIRED
1. What is the opportunity cost of interest forgone from purchasing all 240,000 units at the start of the year instead of in 12 monthly purchases of 20,000 units per order?
2. Would this opportunity cost be recorded in the accounting system? Why?
3. Should Lawnox purchase 240,000 units at the start of the year or 20,000 units each month? Show your calculations.