Understanding Inventory Holding Costs and Calculations

School: Clemson University - Course: MBA 8060 - Subject: Accounting

NAME Courtney Congdon Purpose This exercise is to ensure that you know ho Inventory Holding Cost Inventory holding cost has two components - phys Physical Holding Cost Cost of storing inventory h= fraction of purchase cost of flow hC= cost to carry one unit in invento Opportunity Cost Cost of holding inventory due to forgone return on r= firm's rate of return (annual per C= cost of acquiring (producing) o rC= opportunity cost to hold one un l Unit Inventory Holding Cost= Unit physical holding cost + Unit opportunity cost H=(h+r)C Typically, H, h and r are annual costs and rates respectively, because usuall

Scenario The XYZ company accountants have analyzed the suggest that the physical holdings costs are The XYZ company finance officers have stated th You are the warehouse manager and want to calcu inventory for a year (i.e., H). 1Calculate the information requested ItemCosth Chrome desk lamp$15.50 20% Desk chair$200.00 20% Bookcase$79.50 20% =E44 =E44 =E44 Centura Health uses sterile Intravenous (IV) Start The estimated physical holding cost (operating an The cost of capital is 25% The delivery time is 1 The current order size is 6000 Weekly demand for starter kits = 600 1 What is the cycle inventory given the current orde 6000 IV Starter Kits (Q+0)/23000 =C67/2 2 What is the rationale for calculating the cycle inve Assume Q arrives as soon as there is 0 inven Beginning Inventory =6000 =C67 Ending Inventory =0 #N/A Average Inventory = (BI+EI)/23000 =SUM(C73,C74Example 6.1 (p. 127) Qnow = Icycle =

Example 6.2 Centura health pays $3.00 Centura estimates that its physical holding cost is Centura's annual cost of capital, r, is 3What is the annual physical holding cost for The annual physical h 4What is the opportunity cost to keep one (1) Opportunity c 5Calculate H, the unit annual holding cost (ph Unit annual holding cost of one (1) unit of IV 6Calculate H using the formula H = (h+r)C H=(h+r)C=$0.90 =(F79+E80)