A. This is the cost of the inventory under the new plan, not the cost of the incremental inventory that is held under the new plan compared to the old plan. See the correct answer for a complete explanation.
B. Normally Alpha orders 30,000 cases per month for $12 a case, or a total of $360,000 per month. If they buy this at the beginning of the month and then use it down to zero by month end, the average inventory level outstanding during the month is ($360,000 + $0) ÷ 2, which is $180,000 per month. Since Alpha normally orders 30,000 cases per month, 180,000 cases would be a 6-month supply (180,000 ÷ 30,000 = 6). If they make this new purchase, they would spend a total of $1,800,000 for a 6-month supply, and their average inventory during this six months would be $900,000: ($1,800,000 + $0) ÷ 2. Under this new plan, the average inventory will be $720,000 higher than under the old plan ($900,000 - $180,000). This is money that would not be able to be used for other purposes. So, the cost of tying this money up in inventory for 6 months is ($720,000 × 9%) ÷ 2, or $32,400. (We divide by 2 since the 9% is an annual rate, and we are looking at only a 6-month period.)
C. This answer is incorrect. See the correct answer for a complete explanation.
D. This is the interest cost for 12 months, not six months as this question requires.
