Inventory Policy Cost Evaluation: Astatic, Inc., is a wholesaler of Protoxid for industrial clients. Demand for Protoxid is stable at 350,000 units per year. Astatic orders the product from its supplier four times a year. An order is placed when the total Protoxid on hand amounts to 25,000 units. This represents a nine-day working supply plus safety stock. The companyworks 300 days per year. Recently, management of Astatic has expressed concernover the costs of carrying inventory and is seeking to evaluate the present inventory order and safety-stock policies. As a part of the study, the following costs were identified with respect to Protoxid:

The company estimates its cost of capital is 22 percent. In addition, a study wasconducted on the costs of a stockout. The average stockout costs $5,400 due to the need to request special shipments from alternate suppliers. With various safety-stock levels, the probabilities of a stockout decrease as follows:

For determining order quantity, a stockout probability per order of .02 may beassumed. Order sizes are restricted to round lots of 5,000. The company has the capacity to store 90,000 units.

Required:

a. What are the differential costs for inventory policy making?

b. What are the annual costs under the present order and safety-stock system?

c. What are the annual costs under the optimal order and safety-stock system?

d. What is the reorder point under the optimal order and safety-stock system?

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Invoice price Weight per unit Shipping charges Tax on each unit Special packaging Insurance on shipment Processing order documents Unloading operations Inspect and count for annual inventory Rental of unloading equipment (1-day minimum rental- 200,000-unit daily capacity) Estimated obsolescence costs Inventory record maintenance Inventory tax Inventory insurance $ 32.92 1.5 kg $ 1.05 per unit +$640 per truck $.40 per kg. 1.80 3.65 ($1 is refunded on return of the shipping container). 1.76 per unit-casualty insurance 415.00 per shipment-liability bond 183.00 .82 per unit +$1,800 per week 2.63 per unit 222.00 per day 1.35 per unit .92 per unit +$2,200 per week 3% of invoice price 15% of invoice price +$4,100 per month