A hospital wants to reduce its operating costs as much as possible without compromising patient care. One area that presents a large opportunity for reducing its current costs is inventory reduction. Recently a pharmaceutical company has approached the hospital with a new scan-prep liquid. This is a liquid that patients drink prior to getting a CT scan or MRI to help give clearer images. The current prep liquid has a fairly short shelf life and demand for the item is fairly erratic. Consequently, the hospital never seems to have the right amount. They are always either running short of the amount they need and scrambling (at great expense) to get more, or they are disposing of it because it has exceeded its shelf life and can't be used. In addition, due to refrigeration costs, spoilage, and other related storage problems the estimated annual holding cost per liter of the present liquid is much higher than the newer liquid's anticipated holding cost because of its shelf life & that it doesn't need to be refrigerated. In addition, the supplier of the new prep has a production facility about 75 miles from the hospital and they are willing to guarantee a much shorter lead time for delivery of orders. Being a hospital it obviously operates 365 days a year. The table below shows other relevant numbers for both the old and new prep liquid. Given the increase in price would you recommend the switch? Your response must provide relevant calculation and cost information to back up your recommendation. Assume a 95% service level or a 5% stockout risk for your calculations.

Old Liquid Prep		New Liquid Prep
Price per liter	$28.00	Price per liter	$42.00
Annual Holding Cost/Unit as a % of price	50%	Annual Holding Cost/Unit as a % of price	25%
Cost to Place 1 Order	$25.00	Cost to Place 1 Order	$25.00
Annual Demand	5475	Annual Demand	3285
Average Daily Demand	15	Daily Demand	9
Daily Std Dev. Of Demand	13	Daily Std Dev. Of Demand	6
Lead time for replenishment in days	5	Lead time for replenishment in days	1