Best Trim, a manufacturer of lawn mowers, predicts that it will purchase 204,000

Question

Best Trim, a manufacturer of lawn mowers, predicts that it will purchase 204,000 spark plugs next year. Best Trim estimates that 17,000 spark plugs will be required each month. A supplier quotes a price of $9 per spark plug. The supplier also offers a special discount option: If all 204,000 spark plugs are purchased at the start of the year, a discount of 2% off the $9 price will be provided. Best Trim can invest its cash at 10% per year. It costs Best Trim $260 to place each purchase order. Answer the following questions: 1. What is the opportunity cost of interest forgone from purchasing all 204,000 units at the start of the year instead of 12 monthly purchases of 17,000 units per order?   2. Would this opportunity cost be recorded in the accounting system? Why? 3. Should Best Trim purchase 204,000 units at the start of the year or 17,000 units each month? Show your calculations.   4. What other factors should Best Trim consider when making its decision? Problem 2: Choosing Customers Rodeo Printers operates a printing press with a monthly capacity of 4,000 machine-hours. Rodeo has two main customers: Trent Corporation and Julie Corporation. The data for each customer for January are: Trent Corporation Julie Corporation Revenues $210,000 $140,000 Total Variable costs $350,000 84,000 85,000 Contribution margin 169,000 126,000 55,000 Fixed costs ( allocated) 181,000 102,000 68,000 Operating income 170,000 $24,000 $13,000 Machine $11,000hours required 3,000 hours 1,000 hours 4,000 hours Julie Corporation indicates that it wants Rodeo to do an additional $140,000 worth of printing jobs during February. These jobs are identical to the existing business Rodeo did for Julie in January in terms of variable costs and machine-hours required. Rodeo anticipates that the business from Trent Corporation February
will be the same as that in January. Rodeo can choose to accept as much of the Trent and Julie business for February as its capacity allows. Assume that total machine-hours and fixed costs for February will be the same as in January. What action should Rodeo take to maximize its operating income? Show your calculations. What other factors should Rodeo consider before making a decision?

Explanation / Answer

Since, multiple questions have been posted and the first question has 4 parts, it has been answered.

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Part 1)

The opportunity cost of interest forgone is calculated with the use of following table:

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Part 2)

No, the opportunity cost is not recorded in an accounting system. Only the costs which are actual in nature get recorded in the accounting system. Opportunity cost is useful for making business decisions and donot actually take place like day to day business costs.

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Part 3)

The calculations related to each alternative are shown below:

Trim should purchase 17,000 spark plugs each month as it results in a lower total cost by $42,734. It means that the total cost associated with placing orders and purchasing $17,000 spark plugs each month is less than the opportunity cost including purchasing costs of buying a larger inventory of 204,000 spark plugs at the beginning of the year.

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Part 4)

The company should consider the cost of insurance, storage, material handling and the possibility of reduction in spoilage and obsolescence associated with holding lower inventory in comparision to buying and holding large inventory before taking a decision.

Per Unit Cost for Orders of 17,000 Spark Plugs 9 Per Unit Cost for Order of $204,000 (9 - 2%*9) 8.82 Average Investment in Inventory (204,000*8.82/2) 899,640 Average Investment in Inventory (17,000*9/2) 76,500 Net Difference in Average Investment 823,140 Opportunity Cost of Interest Forgone from 204,000 Units Purchased at the Beginning of the Year (823,140*10%) $82,314

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