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Denton Pet Clinic is a growing business owned by two veterinarians who employ five full-time clerks and a new full-time business manager

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Denton Pet Clinic is a growing business owned by two veterinarians who employ five full-time clerks and a new full-time business manager. The new business manager believes that Denton could save a lot of money by improving its inventory management, even though Denton Pet Clinic stocks very little except pharmaceuticals, cleaning supplies, and some miscellaneous products. In the case of pharmaceuticals, Denton purchases most drugs from a supply company who offers very good prices and who ships to veterinarians overnight (lead time 1 day) for a flat fee of $15. Using this overnight service, Denton Pet Clinic has been in the habit of simply ordering a dozen (12) boxes of any drug when only one box (unscientific safety stock) plus a day’s usage of that drug remain in stock near the end of a business day. The business manager has gathered the information, shown in the table below, on the most common drug, Rabies booster vaccine, purchased routinely from this supply company.

The business manager estimates that Denton’s holding costs for these small but expensive supplies is best estimated by the business’s cost of capital, 10% (in other words the unit holding cost annually, H, equals 10% of unit cost). The business manager suspects that Denton’s habit of always ordering a dozen (12) boxes and using overnight delivery service hasn’t been a good rule-of-thumb. He thinks that better order sizes might be identified if this issue were treated more scientifically. Also, if Denton uses a regular five-business-day delivery service, the shipping cost is reduced to $5 per order.

Denton Pet Clinic needs enough inventory in its system to provide a 99% of service level to its customers. Assume there are average thirty days in a month. Please help the business manager find an optimal inventory policy by answering the following question.

With the current ordering method: a dozen boxes with overnight delivery, what is the annual inventory ordering and holding cost for the Rabies booster vaccine?