Safety Circuits Inc. is considering investing in a scanner such that they can move from an (R, S) to an (s, Q) inventory policy (see Problem 6.15). It is expected that with a continuous- review policy, the firm could reduce inventory management costs significantly:

holding and shortage costs could be reduced. Management believes that for each unit short, there is an implicit charge B2 = 0.15.

a. Determine the safety factor, SS, and reorder point for each of the three products, assuming that the same lot sizes are adopted.

b. Determine the total relevant costs for the XRL product line under an (s, Q) policy and B2 = 0.15.

c. Determine the total relevant costs for the XRL product line under an (R, S) policy and B2 = 0.15.

d. Assume that the scanner costs $30,000, and its operating costs are immaterial. The XRL product line is a good representative of the products carried by SFI, and that it comprises 1% of the total average stock for the firm. Calculate the time before the investment breaks even (disregard cost of money). Would you recommend the change?

Discuss.