Requirements

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?

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

Should Grass Eaters purchase $204,000$ units at the start of the year or $17,000$ units each month? Show your

calculations.

What other factors should Grass Eaters consider when making its decision? The opportunity cost

$$

would

would not

be recorded in the accounting$$ system, due to

$$

an actual

no actual

transaction being recorded in the accounting system.

Part $4$

Requirement $3.$ Should Grass EatersGrass Eaters purchase $204$ comma $000204,000$ units at the start of the year or $17$ comma $00017,000$ 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 $204,000$

Purchase $17,000$

spark plugs at

spark plugs at beginning

beginning of year

of each month

Difference

Annual purchase$-$order costs

Annual purchase costs

Annual interest income that could be earned

if investment in inventory were invested

Relevant costs

Part $5$

The difference column indicates that purchasing $17$ comma $00017,000$ spark plugs at the beginning of each month is

$$

not preferred

preferred

relative to purchasing $204$ comma $000204,000$ spark plugs at the beginning of the year.

Part $6$

Requirement $4.$ What other factors should Grass EatersGrass Eaters consider when making its$$ decision?

If other incremental benefits of holding lower inventory such as

$$

higher insurance, materials handing, payroll, storage, obsolescence, and breakage costs

lower insurance, materials handling, storage obsolescence, and breakage costs

were$$ considered, the costs under

$$

Alternative A

Alternative B

would have been$$ higher, and

$$

Alternative A would be preferred even more.

Alternative B would be preferred even more.