Olivia’s Beauty Salon purchases inventory supplies from a variety of vendors, some of which require a four-week lead time before delivering inventory purchases. To ensure that she will not run out of supplies, Olivia Stear, the owner, maintains a large inventory. The average cost of inventory on hand is $9,000. Ms. Stear usually finances inventory purchases with a line of credit that has a 12 percent annual interest charge. Her accountant has suggested that she purchase all inventory from a single large distributor that can satisfy all of her orders within a three-day period. With such prompt delivery, Ms. Stear would be able to reduce her average inventory balance to $2,000. She also believes that she could save $1,000 per year through reduced phone bills, insurance costs, and warehouse rental costs associated with ordering and maintaining the higher level of inventory.
Required
a. Is the inventory system the accountant suggested to Ms. Stear a pure or approximate just-in-time system?
b. Based on the information provided, how much inventory holding cost could Ms. Stear eliminate by taking the accountant’s advice?