Grass Eaters, a manufacturer of lawn mowers, predicts that it will purchase 264,000 spark plugs next year. Grass Eaters estimates that 22,000 spark plugs will be required each month. A supplier quotes a price of $8.00 per spark plug. The supplier also offer a special discount option: If all 264,000 spark plugs are purchased at the start of the year, a discount of 2% off the $8.00 price will be given. Grass Eaters can invest its cash at 10% per year. It costs Grass Eaters $280 to place each purchase order. Read the requirements Requirement 1. What is the opportunity cost of interest forgone from purchasing all 264,000 units at the start of the year instead of in 12 monthly purchases of 22,000 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. = Opportunity cost Requirements 1. What is the opportunity cost of interest forgone from purchasing all 264,000 units at the start of the year instead of in 12 monthly purchases of 22,000 units per order? 2. Would this opportunity cost be recorded in the accounting system? Why? 3. Should Grass Eaters purchase 264,000 units at the start of the year or 22,000 units each month? Show your calculations. 4. What other factors should Grass Eaters consider when making its decision?
Grass Eaters, a manufacturer of lawn mowers, predicts that it will purchase 264,000 spark plugs next year. Grass Eaters estimates that 22,000 spark plugs will be required each month. A supplier quotes a price of $8.00 per spark plug. The supplier also offer a special discount option: If all 264,000 spark plugs are purchased at the start of the year, a discount of 2% off the $8.00 price will be given. Grass Eaters can invest its cash at 10% per year. It costs Grass Eaters $280 to place each purchase order. Read the requirements Requirement 1. What is the opportunity cost of interest forgone from purchasing all 264,000 units at the start of the year instead of in 12 monthly purchases of 22,000 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. = Opportunity cost Requirements 1. What is the opportunity cost of interest forgone from purchasing all 264,000 units at the start of the year instead of in 12 monthly purchases of 22,000 units per order? 2. Would this opportunity cost be recorded in the accounting system? Why? 3. Should Grass Eaters purchase 264,000 units at the start of the year or 22,000 units each month? Show your calculations. 4. What other factors should Grass Eaters consider when making its decision?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Grass Eaters, a manufacturer of lawn mowers, predicts that it will purchase 264,000 spark plugs next year. Grass Eaters estimates that 22,000 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 264,000 spark plugs are purchased at the start of the year, a discount of 2% off the $8.00 price will be given. Grass Eaters can invest its cash at 10% per year. It costs Grass Eaters $280 to place each purchase order.
Read the requirements
Requirement 1. What is the opportunity cost of interest forgone from purchasing all 264,000 units at the start of the year instead of in 12 monthly purchases of 22,000 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.
Opportunity cost
Requirements
What is the opportunity cost of interest forgone from purchasing all 264,000 units at the start of the year instead of
in 12 monthly purchases of 22,000 units per order?
2. Would this opportunity cost be recorded in the accounting system? Why?
1
3.
Should Grass Eaters purchase 264,000 units at the start of the year or 22,000 units each month? Show your
calculations.
4. What other factors should Grass Eaters consider when making its decision?
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