costacctg13_sm_ch11

64240000 9 annualinterestinco methatcouldbeearned if

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Unformatted text preview: nson does not give up anything by not making CB3s. Svenson is best off leaving the capacity idle (rather than manufacturing and selling CB3s). 11­8 11­21 (10 min.) Inventory decision, opportunity costs. 1. Unit cost, orders of 20,000 Unit cost, order of 240,000 (0.96 ´ $9.00) Alternatives under consideration: (a) Buy 240,000 units at start of year. (b) Buy 20,000 units at start of each mo nth. Average investment in inventory: (a) (240,000 ´ $8.64) ÷ 2 (b) ( 20,000 ´ $9.00) ÷ 2 Difference in average invest ment $9.00 $8.64 $1, 036,800 90,000 $ 946,800 Opportunity cost of interest forgone fro m 240,000­unit purchase at start of year = $946,800 ´ 0.10 = $94,680 2. No. The $94,680 is an opportunit y cost rather than an incremental or outlay cost. No actual transact ion records the $94,680 as an entry in the accounting system. 3. The fo llowing table presents the two alternat ives: Alternative A: Alternative B: Purchase Purchase 240,000 20,000 spark plugs at spark plugs beginning of at beginning year of each month Difference (1) (2) (3) = (1) – (2) Annual purchase­order costs (1 ´ $200; 12 ´ $200) Annual purchase ( incremental) costs (240,000 ´ $8.64; 240,000 ´ $9) Annual interest inco me that could be earned if invest ment in inventory were invested (opportunit y cost) (10% ´ $1,036,800; 10% ´ $90,000) Relevant costs $ 200 2,073,600 $ 2,400 2,160,000 $ (2,200) (86,400) 103,680 $2,177,480 9,000 $2,171,400 94,680 $ 6,080 Column (3) indicates that purchasing 20,000 spark plugs at the beginning o f each mo nth is preferred relative to purchasing 240,000 spark plugs at the beginning o f the year because the opportunit y cost of ho lding larger inventory exceeds the lower purchasing and ordering costs. If other incremental benefit s of ho lding 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 Alternat ive B would be preferred even more. 11­9 11­22 (20–25 min.) Relevant costs, contribution margin, product emphasis. 1. Co...
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This note was uploaded on 10/11/2010 for the course ACCT 321 taught by Professor Cole during the Spring '10 term at University of Miami.

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