Lawnox, a manufacturer of lawn mowers, predicts that it will purchase 240,000 spark plugs next year. Lawnox

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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.

Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...
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Cost Accounting A Managerial Emphasis

ISBN: 978-0133392883

6th Canadian edition

Authors: Horngren, Srikant Datar, George Foster, Madhav Rajan, Christ

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