3. Global Lawn, a manufacturer of lawn mowers, predicts that it will purchase 240,000 spark plugs...

Transcribed Image Text:

3. Global Lawn, a manufacturer of lawn mowers, predicts that it will purchase 240,000 spark plugs next year. Global Lawn estimates that 20,000 spark plugs will be required each month. A supplier quotes a price of $9.00 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 2% off the $9.00 price will be given. Global Lawn can invest its cash at 10% per year. It costs Global Lawn $220 to place each purchase order. Read the requirements. Requirement 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? Let's begin the calculation for the opportunity cost of interest forgone by first determining the formula, then calculate the opportunity cost. (1) (2) (3) Opportunity cost Requirement 2. Would this opportunity cost be recorded in the accounting system? Why? The opportunity cost (4) be recorded in the accounting system, due to (5) transaction being recorded in the accounting system. Requirement 3. Should Global Lawn purchase 240,000 units at the start of the year or 20,000 units each month? Show your calculations. Begin by calculating the relevant costs for each alternative, then calculate the difference between the two alternatives. Alternative A: Purchase 240,000 Alternative B: Purchase 20,000 Annual purchase-order costs Annual purchase costs Annual interest income that could be earned if investment in inventory were invested Relevant costs spark plugs at beginning of year spark plugs at beginning of each month Difference The difference column indicates that purchasing 20,000 spark plugs at the beginning of each month is (6) Requirement 4. What other factors should Global Lawn consider when making its decision? relative to purchasing 240,000 spark plugs at the beginning of the year. If other incremental benefits of holding lower inventory such as (7) were considered, the costs under (8) would have been higher, and (9) 1: Requirements 1. 2. What 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? Would this opportunity cost be recorded in the accounting system? Why? 3. 4. Should Global Lawn purchase 240,000 units at the start of the year or 20,000 units each month? Show your calculations. What other factors should Global Lawn consider when making its decision? (1) O O Units purchased per year (2) O O Investment percentage (3) O 98% (4) would O Difference in annual purchase costs O Discount percentage 2% O would not O Difference in average investment Units purchased per month O Discounted price per unit Full price per unit 10% 90% (5) an actual O no actual (6) not preferred O preferred 3. Global Lawn, a manufacturer of lawn mowers, predicts that it will purchase 240,000 spark plugs next year. Global Lawn estimates that 20,000 spark plugs will be required each month. A supplier quotes a price of $9.00 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 2% off the $9.00 price will be given. Global Lawn can invest its cash at 10% per year. It costs Global Lawn $220 to place each purchase order. Read the requirements. Requirement 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? Let's begin the calculation for the opportunity cost of interest forgone by first determining the formula, then calculate the opportunity cost. (1) (2) (3) Opportunity cost Requirement 2. Would this opportunity cost be recorded in the accounting system? Why? The opportunity cost (4) be recorded in the accounting system, due to (5) transaction being recorded in the accounting system. Requirement 3. Should Global Lawn purchase 240,000 units at the start of the year or 20,000 units each month? Show your calculations. Begin by calculating the relevant costs for each alternative, then calculate the difference between the two alternatives. Alternative A: Purchase 240,000 Alternative B: Purchase 20,000 Annual purchase-order costs Annual purchase costs Annual interest income that could be earned if investment in inventory were invested Relevant costs spark plugs at beginning of year spark plugs at beginning of each month Difference The difference column indicates that purchasing 20,000 spark plugs at the beginning of each month is (6) Requirement 4. What other factors should Global Lawn consider when making its decision? relative to purchasing 240,000 spark plugs at the beginning of the year. If other incremental benefits of holding lower inventory such as (7) were considered, the costs under (8) would have been higher, and (9) 1: Requirements 1. 2. What 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? Would this opportunity cost be recorded in the accounting system? Why? 3. 4. Should Global Lawn purchase 240,000 units at the start of the year or 20,000 units each month? Show your calculations. What other factors should Global Lawn consider when making its decision? (1) O O Units purchased per year (2) O O Investment percentage (3) O 98% (4) would O Difference in annual purchase costs O Discount percentage 2% O would not O Difference in average investment Units purchased per month O Discounted price per unit Full price per unit 10% 90% (5) an actual O no actual (6) not preferred O preferred