Using JIT to reduce inventory holding costs Cole Automobile Dealership, Inc. (CAD), buys and sells a variety of cars made by Great Motor Corporation. CAD maintains about 30 new cars in its parking lot for customers’ selection; the cost of this inventory is approximately $320,000. Additionally, CAD hires security guards to protect the inventory from theft and a maintenance crew to keep the facilities attractive. The total payroll cost for the guards and maintenance crew amounts to $80,000 per year. CAD has a line of credit with a local bank that calls for a 15 percent annual rate of interest. Recently, Ron Nader, the president of CAD, learned that a competitor in town, Smartt Dealership, has been attracting some of CAD’s usual customers because Smartt could offer them lower prices. Mr. Nader also discovered that Smartt carries no inventory at all but shows customers a catalog of cars as well as pertinent information from online computer databases. Smartt promises to deliver any car that a customer identifies within three working days.

Required

a. Based on the information provided, determine CAD’s annual inventory holding cost.

b. Name the inventory system that Smartt uses and explain how the system enables Smartt to sell at reduced prices.