41 C.F.R. § 101-27.304-1 Establishment of economic retention limit.
Title 41 - Public Contracts and Property Management
An economic retention limit must be established for inventories so that the Government will not incur any more than the minimum necessary costs to provide stock of an item at the time it is required. Generally, it would be more economical to dispose of stock in excess of the limit and procure stock again at a future time when the need is more proximate rather than incur the cumulative carrying costs. (a) The agency managing a centrally managed or agency managed item shall establish an economic retention limit so that the total cumulative cost of carrying a stock of the item (including interest on the capital that is tied up in the accumulated carrying costs) will be no greater than the reacquisition cost of the stock (including the procurement or order cost). Consideration should be given to any significant net return that might be realized from present disposal of the stock. Where no information has been issued, the net return from disposal is assumed to be zero. Guidelines for setting stock retention limits are provided in the following table and explanatory remarks that follow: At 25 percent a year, accumulated carrying costs would be equivalent to the reacquisition costs after 3 (b) The economic retention limit at a user stocking activity can best be determined by the item manager (for centrally managed or agency managed items) on the basis of overall Government requirements and planned procurement. Since stocks in long supply at a user stocking activity are less likely to find utilization outlets, the retention limit at these activities should be relatively small. Generally the economic retention limit at a user stocking activity should be computed in the same manner as in paragraph (a) of this section and then reduced by 70 percent. [39 FR 27902, Aug. 2, 1974]
Title 41: Public Contracts and Property Management
PART 101–27—INVENTORY MANAGEMENT
Subpart 101–27.3—Maximizing Use of Inventories
§ 101-27.304-1 Establishment of economic retention limit.
------------------------------------------------------------------------ Economic retention limit in years of supply_net Annual carrying return on disposal as a percentage of item costs as a reacquisition costs percentage of item ----------------------------------------------------reacquisition costs 0 5 10 15 20------------------------------------------------------------------------ 10 7\1/4\ 6\3/4\ 6\1/4\ 6 5\1/2\ 15 5\1/2\ 5 4\3/4\ 4\1/4\ 4 20 4\1/4\ 4 3\3/4\ 3\1/2\ 3\1/4\ 25 3\1/2\ 3\1/4\ 3 3 2\3/4\ 30 3 2\3/4\ 2\3/4\ 2\1/2\ 2\1/4\ 35 2\3/4\ 2\1/2\ 2\1/4\ 2\1/4\ 2 40 2\1/2\ 2\1/4\ 2 2 1\3/4\------------------------------------------------------------------------Note: The entries in the tables were calculated by determining how long an item must be carried in inventory before the total cumulative carrying costs (including interest on the additional funds that would be tied up in the accumulated annual carrying costs) would exceed the acquisition costs of the stock. at that time (reacquisition costs). For example, assuming no net return from disposal, the accumulated carrying costs computed at the rate of 25 percent per year on the reacquisition cost of the stock and compounded annually at 10 percent (GSA's recommended rate of interest on Government investments) would be:
------------------------------------------------------------------------ Compounded carrying Accumulated costs as a Years costs as a percentage of percentage of reacquisition reacquisitioned costs------------------------------------------------------------------------ 1 27.5 27.5 2 30.3 57.8 3 33.3 91.1 4 36.6 127.7 5 40.3 168.0 6 44.3 212.3------------------------------------------------------------------------
