Best Trim, a manufacturer of lawn mowers, predicts that it will purchase 204,000 spark plugs next year.

Question:

Best Trim, a manufacturer of lawn mowers, predicts that it will purchase 204,000 spark plugs next year. Best Trim estimates that 17,000 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 204,000 spark plugs are purchased at the start of the year, a discount of 2% off the $ 9 price will be given. Best Trim can invest its cash at 10% per year. It costs Best Trim $ 260 to place each purchase order.

Required

1. What is the opportunity cost of interest forgone from purchasing all 204,000 units at the start of the year instead of in 12 monthly purchases of 17,000 units per order?

2. Would this opportunity cost be recorded in the accounting system? Why?

3. Should Best Trim purchase 204,000 units at the start of the year or 17,000 units each month? Show your calculations.

4. What other factors should Best Trim consider when making its decision?

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,...