(a) Using the following information, calculate the inventory carrying cost percentage.
(b) Would it be a good decision to spend $850,000 per year in increased production setup costs and premium transportation costs in order to achieve an inventory reduction of 12%?
- Finished goods inventory is $40 million at full manufactured cost.
- Variable manufactured cost of inventory is 60% of full manufactured cost.
- Variable transportation cost was $2 million.
- Variable warehousing cost to move inventory into storage was $320,000.
- The company was experiencing capital rationing and required that new investments earn at least 25% before taxes.
- Personal property taxes paid on inventory were approximately $220,000.
- Insurance coverage to protect against loss of inventory was $125,000.
- Storage charges at public warehouses totaled $400,000.
- Obsolescence was $90,000.
- Theft of inventory was $85,000.
- Damage related to inventory storage was $45,000.
- Transportation cost of cross-shipping inventory to avoid obsolescence was $35,000.