Question

Lawnwolf, a manufacturer of lawn mow-ers, predicts that it will purchase 240,000 spark plugs next year. Lawnwolf estimates that 20,000 spark plugs will be required each month. A supplier quotes a price of $ 11 per spark plug. The supplier also offers a special discount option: If Lawnwolf purchases all 240,000 spark plugs at the start of the year, the supplier gives a discount of 4% off the $ 11 price. Lawnwolf can invest its cash at 10% per year. Lawnwolf spends $ 220 to place each purchase order.

Required
1. What is the opportunity cost for Lawnwolf 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 managers record this opportunity cost in the accounting system? Why?
3. Should Lawnwolf purchase 240,000 units at the start of the year or 20,000 units each month? Show your calculations.
4. What other factors should Lawnwolf consider when making its decision?



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  • CreatedJanuary 15, 2015
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