Firm BlueMountain Inc. carries product A as inventory. The total warehousing cos

Question

Firm BlueMountain Inc. carries product A as inventory. The total warehousing cost is $75,303 in 2014. Due to obsolescence, this inventory lost its market value by $22,000 in 2014. The manager estimated that the average inventory level for product A is 1,077 units during 2014. The unit purchasing cost of A is $500. In addition, the risk free interest rate is 3% per year. What is your estimate of the inventory holding cost per year in percentage? Ignore the percentage sign, round to the nearest integer. For example, if your answer is 34.56%, fill in 35; if your answer is 76.43%, fill in 76.

Explanation / Answer

Total holding cost = total warehouse cost + capacity cost + depreciation cost

Total holding cost = 75303 + 1077*3%*500 + 22000

Total holding cost = $113458

Value of the average inventory = 1077*500 = $538500

Inventory holding cost = 113458/538500 = 21.07%

Or

Inventory holding cost = 21

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