A major supplier has offered a corporation a year-end special purchase whereby it could purchase 180,000 cases of sport drink at $10 per case. The corporation normally orders 30,000 cases per month at $12 per case. The corporation’s cost of capital is 9%. In calculating the overall opportunity cost of this offer, the cost of carrying the increased inventory would be
Question
A major supplier has offered a corporation a year-end special purchase whereby it could purchase 180,000 cases of sport drink at 12 per case. The corporation’s cost of capital is 9%. In calculating the overall opportunity cost of this offer, the cost of carrying the increased inventory would be
Solution
To calculate the overall opportunity cost of this offer, we need to consider the cost of carrying the increased inventory.
Step 1: Calculate the carrying cost per case per year The carrying cost is the cost of holding inventory over a certain period of time. In this case, we need to calculate the carrying cost per case per year.
Carrying cost per case per year = Cost of capital * Cost per case Carrying cost per case per year = 9% * 0.90
Step 2: Calculate the carrying cost for the increased inventory The corporation normally orders 30,000 cases per month, which means it would order 360,000 cases per year. With the special purchase offer, the corporation would have an additional 180,000 cases.
Carrying cost for the increased inventory = Carrying cost per case per year * Additional cases Carrying cost for the increased inventory = 162,000
Therefore, the cost of carrying the increased inventory would be $162,000.
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