ABC Co, a distributor of video recording equipment, is looking to reduce inventory costs. John, the new materials manager, is considering the inventory policy for HS008, a popular device used to monitor and control many environmental conditions in manufacturing settings. Hal has recently discovered that over the last 5+ years since the HS008 was added to the ABC Co product line, the inventory of HS008 has never fallen below 51 units and is typically much higher, even just before the arrival of new shipments. These high inventory levels have provided a 100% service level and very high inventory holding costs for these expensive devices. John would like to accept a lower service level (85% during lead time) to reduce holding costs. The lead time to receive orders from the supplier in Japan has consistently been about two months.

Currently, ABC Co has 1510 units of HS008 in inventory, and there are currently no outstanding orders for additional inventory. This is the only product that ABC Co orders from this particular supplier. The estimated transaction cost per order placed is $600, and the annual per unit inventory holding cost is considered to be 48% of the purchase price. The supplier offers discounts for large orders. The pricing works as follows: