Varico produces HO-scale trains, including a diesel locomotive that sells 100,000 units annually....

Question

Varico produces HO-scale trains, including a diesel locomotive that sells 100,000 units annually.

Each unit requires an electric motor. Presently these are purchased once a week from a local

manufacturer for $10 apiece. However, a foreign firm has offered to sell Varico a container

of 100,000 motors of like quality for only $9.50 apiece. Given an interest rate of 15 percent,

what should Varico do?

Robert · Accepted Answer

Solution-
If the firm is purchase 100,000 motor today, then the average inventory of firm 50,000 (100,000/2) during the entire year. 
So, the opportunity cost for maintaining the level of inventory equals to…..

Varico produces HO-scale trains, including a diesel locomotive that sells 100,000 units annually. Each unit requires an electric motor. Presently these are purchased once a week from a local...

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