Gwen Pet Supplies purchases its inventory from a variety of suppliers, some of which require a six-week lead time before delivering the goods.

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

2. Based on the information provided, how much of Ms. Leblanc’s inventory holding cost could be eliminated by taking the accountant’s advice?
   
   
   Answer
   Reduced cost of inventory: $67,000 − $17,000 = $50,000
   Finance cost: $50,000 × 5% = $2,500
   Total eliminated inventory holding cost: $2,500 + $9,000 = $11,500