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Gwen Pet Supplies purchases its inventory from a variety of suppliers, some of which require a six-week lead time before delivering the goods.
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Gwen Pet Supplies purchases its inventory from a variety of suppliers, some of which require a six-week lead time before delivering the goods. To ensure that she has a sufficient supply of goods on hand, Ms. Leblanc, the owner, must maintain a large supply of inventory. The cost of this inventory averages $67,000. She usually finances the purchase of inventory and pays a 5 percent annual finance charge. Ms. Leblanc's accountant has suggested that she establish a relationship with a single large distributor who can satisfy all of her orders within a two-week time period. Given this quick turnaround time, she will be able to reduce her average inventory balance to $17,000. Ms. Leblanc also believes that she could save $9,000 per year by reducing phone bills, insurance, and warehouse rental space costs associated with ordering and maintaining the larger level of inventory.
Required
- Based on the information provided, how much of Ms. Leblanc's inventory holding cost could be eliminated by taking the accountant's advice?
