CMA Study Group

So we can agree the total investment will be 36000 dollars right ? Let's divide it into two sections 1. monthly order + investment in 8% interest giving bank  2. One time purchase. (Assumption :- all the purchase is made at the beginning of the month to start that months production)

1. If I order monthly at the end of the year it would cost 36000 in total but ordering monthly has a advantage and that is the interest we get from investing the amount in Bank .so let's start our calculations from January so we incur 3000 and purchased our 1st order so what's the remaining value to be paid throughout the year ? (36000-3000) = 33000 . The n in February again we purchased now what's the amount left to be paid throughout the year (33000-3000) = 30000. Likewise in March it will be 27k , April 24k , may 21k, June 18k, July 15k , August 12k , sept 9k, October 6k, November 3k. So , if you now calculate the avg balance remaining(summation of balance at the end of each month ÷ 12 ) throughout the year it will come 16500 so we can say this is the amount which is equivalently invested in the bank and it's interest of an year will be 1320 dollars. For your cross referencing you can calculate each month interest also like in January you incurred 3000 at the beginning and your bank had 33000 which will give interest (8% at one month jan) 220 dollars , similarly in February beginning you incurred 3000 more and your bank had 30000 dollars which will give you the interest (8% at one month Feb) 200 . Like wise 180 in March , 160 in April , 140 in May , 120 in June , 100 in July , 80 in August , 60 in September, 40 in October and 20 in November . (Note:- at the end of November you had 3000 dollars which you would have invested at the beginning of December thus , December wouldn't have any interest) now if you total the interest (220+200+180+160+140+120+100+80+60+40+20) = 1320 dollars , so if you have purchased monthly and put the total amount in a bank you would have earned 1320 dollars as interest which would have decreased the cost .
2. But you had to buy 36000 at once so there's no interest reduction of 1320 dollars that means it is your opportunity cost(one rupee saved is one rupee earned)

Hi! Based on my understanding, one of the reasons of using average incremental investment is for simplification. It is somehow similar to the average inventory where the numerator is divided by 2. In the problem, it divides the 33,000 by 2. Also, I saw this concept - This method assumes a linear change in inventory levels over the period. In other words, it assumes that inventory levels decrease steadily from the beginning to the end of the period. While this might be a reasonable approximation for some businesses, it's important to understand that it's a simplification. I hope this helps. Good luck on your preparations!

We need to average the $3,000.00 cost of 5,000 units which supposedly incurred monthly over the next 11 months.  $3,000.00/2 x 11 months = $16,500.00.  Since in advance rather monthly, we need to apply 8% opportunity cost as a result of Tailor's decision.  I believe, there is no opportunity cost if purchase monthly.  Correct me if i'm wrong.

No there will be no opportunity cost if purchased monthly . But , when purchased the whole lot at once there will be opportunity cost

You are correct, there's no opportunity cost for monthly purchase.  The tailor prefer it to purchase monthly but there's no guarantee for the monthly delivery from the supplier, that's why decided it to purchase in advance the required number of zippers for the next 11 months.