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.

		Difference in average investment		x		Investment percentage		=		Opportunity cost

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

The opportunity cost would not be recorded in the accounting system, due to

no actual transaction being recorded in the accounting system.

Requirement 3. Should

Lawn World 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:	Alternative B:
		Purchase 240,000	Purchase 20,000
		spark plugs at	spark plugs at beginning
		beginning of year	of each month
Annual purchase-order costs
Annual purchase costs
Annual interest income that could be earned
if investment in inventory were invested
Relevant costs
	The difference column indicates that purchasing 20,000 spark plugs at the beginning of each month is relative to purchasing 240,000

spark plugs at the beginning of the year.

Requirement 4. What other factors should Lawn World consider when making its decision?

If other incremental benefits of holding lower inventory such as lower insurance, materials handling, storage obsolescence, and breakage costs were considered, the costs under Alternative A would have been higher, and Alternative B would be preferred even more.

Lawn World, a manufacturer of lawn mowers, predicts that it will purchase 240,000 spark plugs next year. Lawn World estimates that 20,000 spark plugs will be required each month A supplier quotes a price of $8.00 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 4% off the $8.00 price will be given. Lawn World can investits cash at 10% per year. It costs Lawn World $260 to place each purchase order * Requirements - X of in 12 monthly purchases of 20,000 units per order? lity cost 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 Lawn World purchase 240,000 units at the start of the year or 20,000 units each month? Show your calculations 4. What other factors should Lawn World consider when making its decision? Lawn World, a manufacturer of lawn mowers, predicts that it will purchase 240,000 spark plugs next year. Lawn World estimates that 20,000 spark plugs will be required each month A supplier quotes a price of $8.00 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 4% off the $8.00 price will be given. Lawn World can investits cash at 10% per year. It costs Lawn World $260 to place each purchase order * Requirements - X of in 12 monthly purchases of 20,000 units per order? lity cost 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 Lawn World purchase 240,000 units at the start of the year or 20,000 units each month? Show your calculations 4. What other factors should Lawn World consider when making its decision