A company carries an average annual inventory of $1,000,000. If the cost of capital is 10%, storage costs are 8%, and risk costs are 7%, what does it cost per year to carry this inventory?
A) $100,000
B) $80,000
C) $70,000
D) $250,000
E) cannot be determined from the data given

Question

Quizplus · Accepted Answer

The cost of carrying inventory can be calculated as:

Cost = Average inventory value x (Cost of capital + Storage costs + Risk costs)

= $1,000,000 x (10% + 8% + 7%)

= $1,000,000 x 25%

= $250,000

Therefore, the cost to carry this inventory is $250,000 per year. The correct answer is option D.

A Company Carries an Average Annual Inventory of $1,000,000