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 :
If the corporation makes the special purchase of 6 months of inventory (180,000 cases ÷ 30,000 cases per month),
the average inventory for the 6 month period will be $900,000 [(180,000 × $10) ÷ 2].
If the special purchase is not made, the average inventory for the same period will be the average monthly inventory of $180,000 [(30,000 × $12) ÷ 2].
Accordingly, the incremental average inventory is $720,000 ($900,000 – $180,000),
and the interest cost of the incremental 6 month investment is $32,400 [($720,000 × 9%) ÷ 2].