Thornton Manufacturing Company obtains its raw materials from a variety of suppliers. Thornton's strategy is to obtain the best price by letting the suppliers know that it buys from the lowest bidder. Approximately four years ago, unexpected increases in demand resulted in materials shortages. Thornton was unable to find the materials it needed even though it was willing to pay premium prices. Because of the lack of raw materials, Thornton was forced to close its manufacturing facility for two weeks. Its president vowed that her company would never again be at the mercy of its suppliers. She immediately ordered her purchasing agent to perpetually maintain a one-month supply of raw materials. Compliance with the president’s orders resulted in a raw materials inventory amounting to approximately $1,700,000. Warehouse rental and personnel costs to maintain the inventory amounted to $8,600 per month. Thornton has a line of credit with a local bank that calls for a 13 percent annual rate of interest. Assume that Thornton finances the raw materials inventory with the line of credit.
A. Required Based on the information provided, determine the annual holding cost of the raw materials inventory.