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Requirements What is the opportunity cost of interest forgone from purchasing all 2 0 4 , 0 0 0 units at the start of the
Requirements
What is the opportunity cost of interest forgone from purchasing all units at the start of the year instead of
in monthly purchases of units per order?
Would this opportunity cost be recorded in the accounting system? Why?
Should Grass Eaters purchase units at the start of the year or 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
Requirement Should Grass EatersGrass Eaters purchase comma units at the start of the year or comma 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
Purchase
spark plugs at
spark plugs at beginning
beginning of year
of each month
Difference
Annual purchaseorder costs
Annual purchase costs
Annual interest income that could be earned
if investment in inventory were invested
Relevant costs
Part
The difference column indicates that purchasing comma spark plugs at the beginning of each month is
not preferred
preferred
relative to purchasing comma spark plugs at the beginning of the year.
Part
Requirement 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.
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