Cost of carrying inventory

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Carrying Inventory Costs:
These are the expenses of storing goods. Once the goods have been accepted, they become part of the firm's inventories. These costs include insurance, rent/depreciation of warehouse, salaries of storekeeper, his assistants and security personnel, financing cost of money locked-up in inventories, obsolescence, spoilage and taxes. By and large, carrying costs are considered to be a given percentage of the value of inventory held in the warehouse, despite some of the fixed elements of costs which comprise only a small portion of total carrying costs. Approximately, carrying costs are considered to be around 25 percent of the value of inventory held in storage. The greater the investment in inventory, the greater the carrying costs. In the example considered in the case of ordering costs, let us assume that the price per unit of material is $40 and that on an average about half-of the inventory will be held in storage. Then, the average values of inventory for sizes of order 100, 150 and 200 along with carrying cost @ 25 percent of the inventory held in storage are given below.

Size of orders (units): 100 500 200
Average value of inventory: $2000 $3000 $4000
Carrying cost @ 25 percent of above: $500 $750 $1000

From the above calculations, it can be easily seen that as the order size increases, the carrying cost also is increasing in a directly proportionate manner.

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The cost of carrying inventory