You are working for Accenture Consulting, a very large consulting firm. You are in the process of seeking the business of a new client, Raytheon. Raytheon has just purchased a new subsidiary, Widget Corp., in Kalamazoo, Michigan, and is considering hiring you to assist in evaluating the inventory ordering system that this company is presently using. So far the company has used an in-house system based on a rule of thumb that determines, in function of the set-up costsi.e. the costs of setting up the machinery to manufacture the item that it needs, the quantity its manufacturing facility will produce.

Set Up Cost	Order Size
Under 1000	3 Month Supply
Between $1000 and $2500	6 Month Supply
Over $2,500	9 Month Supply

To get an idea of the situation, you decided to study item # 1-58-06-99-351-082, which has a set-up cost of $2,000.00 and an annual usage of 386,000 units. Usage of this part is uneven, which means that approximately the same number of items are required each day, but there is some variation. The cost of labor and material to produce this item is $18.00. Since this Michigan Corporation is highly leveraged, it has a poor credit rating and the accounting department informed you that it experiences a cost of capital of 13 percent. In addition, the manufacturing department allocates warehouse costs proportionally to the value of each item in inventory: the percentage contribution of each item in inventory is 5 percent of its value. Finally, the machine on which this part is manufactured is capable of producing 250 parts per hour. The shop operates three shifts of 8 hours each per day, five days a week, and fifty weeks per year.

How much does the current rule-of-thumb practice cost the company every year for item # 1-58-06-99-351-082?

At what inventory level would the company re-order item # 1-58-06-99-351-082?