Kilner Automobile Dealership, Inc. (KAD), buys and sells a variety of cars made by Faire Motor Corporation. KAD maintains about 30 new cars in its parking lot for customers’ selection; the cost of this inventory is approximately $500,000. Additionally, KAD 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. KAD has a line of credit with a local bank that calls for a 12 percent annual rate of interest. Recently, Wayne Pena, the president of KAD, learned that a competitor in town, Shamoon Dealership, has been attracting some of KAD’s usual customers because Shamoon could offer them lower prices. Mr. Pena also discovered that Shamoon carries no inventory at all but shows customers a catalog of cars as well as pertinent information from online computer databases. Shamoon promises to deliver any car that a customer identifies within three working days.
a. Based on the information provided, determine KAD’s annual inventory holding cost.
b. Name the inventory system that Shamoon uses and explain how the system enables Shamoon to sell at reduced prices.