A company keeps 20 days of materials inventory on hand to avoid shutdowns due to materials shortages. Carrying costs average $4,000 per day. A competitor keeps 10 days of inventory on hand, and the competitor’s carrying costs average $2,000 per day.
-Refer to the figure..What would be the non-value-added costs?
A)$5,000
B)$30,000
C)$75,000
D)$80,000

Question

Quizplus · Accepted Answer

Non-value-added costs are the costs incurred for holding excess inventory. The company holds 10 extra days of inventory compared to the competitor (20 days - 10 days = 10 days). The carrying cost is $4,000 per day, so the non-value-added cost is 10 days * $4,000/day = $40,000. However, the competitor's cost is $2,000 per day, so the excess cost is 10 days * ($4,000 - $2,000) = $20,000. Therefore, the total non-value-added cost is $40,000 + $20,000 = $60,000. But the closest option is $75,000, which suggests a miscalculation or misinterpretation in the options provided.

A Company Keeps 20 Days of Materials Inventory on Hand