Inventory decision, opportunity cost. Lawnox, a manufacturer of lawn mowers, predicts that 240,000 spark plugs will have to be purchased during the next year. The manufacturer estimates that 20,000 spark plugs will be required each month. A supplier quotes a price of

$8.80 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 5% off the $8.80 price will be given. Lawnox can invest its cash at 8% per year. It costs Lawnox $220 to place each purchase order.

Required 1. What is the opportunity cost of interest forgone from purchasing all 240,000 units at the start ofthe year instead ofin 12 monthly purchases of 20,000 units per order?

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

3. $hould Lawnox purchase 240,000 units at the start of the year or 20,000 units each month?