Olsen Automobile Dealership, Inc. (OAD), buys and sells a variety of cars made by Great Motor Corporation. OAD maintains about 30 new cars in its parking lot for customers’ selection; the cost of this inventory is approximately $400,000. Additionally, OAD 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 $75,000 per year. OAD has a line of credit with a local bank that calls for a 15 percent annual rate of interest. Recently, Neil Tanner, the president of OAD, learned that a competitor in town, Pardoe Dealership, has been attracting some of OAD’s usual customers because Pardoe could offer them lower prices. Mr. Tanner also discovered that Pardoe carries no inventory at all but shows customers a catalog of cars as well as pertinent information from online computer databases. Pardoe promises to deliver any car that a customer identifies within three working days.
Required
a. Based on the information provided, determine OAD’s annual inventory holding cost.
b. Name the inventory system that Pardoe uses and explain how the system enables Pardoe to sell at reduced prices.