§ 101-27.304-1 - Establishment of economic retention limit.

§ 101-27.304-1 Establishment of economic retention limit.

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:

Annual carrying costs as a percentage of item reacquisition costs	Economic retention limit in years of supply - net return on disposal as a percentage of item reacquisition costs
	0	5	10	15	20
10	71⁄4	63⁄4	61⁄4	6	51⁄2
15	51⁄2	5	43⁄4	41⁄4	4
20	41⁄4	4	33⁄4	31⁄2	31⁄4
25	31⁄2	31⁄4	3	3	23⁄4
30	3	23⁄4	23⁄4	21⁄2	21⁄4
35	23⁄4	21⁄2	21⁄4	21⁄4	2
40	21⁄2	21⁄4	2	2	13⁄4

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:

Years	Compounded carrying costs as a percentage of reacquisition	Accumulated costs as a percentage of 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

At 25 percent a year, accumulated carrying costs would be equivalent to the reacquisition costs after 31⁄2 years. Three and one-half years is, therefore, the economic retention limit for items with a 25 percent annual carrying cost rate. Where an activity has not yet established an estimate of its carrying cost, an annual rate of 10 percent may be used as an interim rate thereby resulting in an economic retention limit of 71⁄4 years when the net return on disposal is zero. The elements of carrying (holding) cost are given in the GSA Handbook, The Economic Order Quantity Principle and Applications. The handbook is listed in the GSA Supply Catalog and may be ordered in the same manner as other items in the catalog.

(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]