Melinda's Beauty Salon purchases inventory supplies from a variety of vendors, some of which require a four-week

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Melinda's Beauty Salon purchases inventory supplies from a variety of vendors, some of which require a four-week lead time before delivering inventory purchases. To ensure that she will not run out of supplies, Melinda Lowe, the owner, maintains a large inventory. The average cost of inventory on hand is $12,000. Ms. Lowe usually finances inventory purchases with a line of credit that has a 9 percent annual interest charge. Her accountant has suggested that she purchase all inventory from a single large distributor that can satisfy all of her orders within a three-day period. With such prompt delivery, Ms. Lowe would be able to reduce her average inventory balance to $2,000. She also believes that she could save $5,000 per year through reduced phone bills, insurance costs, and warehouse rental costs associated with ordering and maintaining the higher level of inventory.
Required
a. Is the inventory system the accountant suggested to Ms. Lowe a pure or approximate just-in-time system?
b. Based on the information provided, how much inventory holding cost could Ms. Lowe eliminate by taking the accountant's advice?
Line of Credit
A line of credit (LOC) is a preset borrowing limit that can be used at any time. The borrower can take money out as needed until the limit is reached, and as money is repaid, it can be borrowed again in the case of an open line of credit. A LOC is...
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Related Book For  book-img-for-question

Fundamental Managerial Accounting Concepts

ISBN: 978-1259569197

8th edition

Authors: Thomas Edmonds, Christopher Edmonds, Bor Yi Tsay, Philip Olds

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