Inventories - raw materials, finished goods and supplies - have associated carry

ID: 400104 • Letter: I

Question

Inventories - raw materials, finished goods and supplies - have associated carrying costs. These include:

Cost of money invested in inventory cases – assume interest being paid on borrowed funds

Cost of storage - Buildings, equipment, insurance, labor, climate control, counting labor, lighting

Obsolescence – Keep stuff too long; BIUB; style; seasonals; lose it

Given:

Finished goods inventory = 278,963 cases

Average production cost per case = $4.326

Rate of interest = 6.85% per year

Warehouse cost per month: utilities @ $5900, labor @ $12,320

Insurance = $4966 per year

Damage factor = $.0965 per case per year

Questions for you to answer (work in whole dollars):

A) What is the FG inventory carrying cost for one (1) month?

B) What is the inventory carrying cost per case for one (1) month?

C) What is the cost of carrying the entire FG inventory for one year?

Annual interest cost per case = 6.85% of $4326 = $296.33

Therefore , annual interest cost 278963 cases = $296.33 x 278963 = $82665105.79

Total monthly warehouse cost = $5900 + $12320 = $18220

Annual warehouse cost = $18220 x 12 = $218640

Annual insurance cost = $4966

Annual damage cost = $0.0965 / case x 278963 cases = $26919.93

Total finished goods inventory carrying cost for whole year

= Total annual interest cost + Annual warehouse cost + Annual insurance cost + Annual damage cost

= $82665105.79 + $218640 + $4966 + $26919.93

= $82915631.72 ( $82915632 rounded to nearest whole number )

Therefore, Finished goods inventory carrying cost for 1 month = $82915631.72/12 =$6909635.97 ( $6909636 rounded to nearest whole number )

Inventory carrying cost per case per month

= Finished goods inventory carrying cost for 1 month / Number of cases

= $6909635.97 / 278963

= $24.769 ( $25 rounded to nearest whole number )

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