Cadmium, Inc., keeps 20 days of materials inventory on hand to avoid shutdowns due to material shortages. Carrying costs average $800 per day. A competitor, Barium Inc., keeps 10 days of inventory on hand, and the competitor's carrying costs average $600 per day. Compute the non-value-added costs incurred by Cadmium, Inc.
A)$7,200
B)$16,000
C)$8,800
D)$12,000

Question

Quizplus · Accepted Answer

Non-value-added costs are those costs that do not add to the value of a product or service. In this case, the non-value-added cost for Cadmium, Inc. is the extra cost it incurs for keeping additional inventory compared to its competitor, Barium Inc. Cadmium keeps 10 more days of inventory than Barium (20 days - 10 days), and with carrying costs of $800 per day, the non-value-added cost is 10 days * $800/day = $8,000. However, to compare directly with Barium Inc., we must also consider the difference in carrying costs. Since Barium's carrying costs are $600 per day for 10 days, this amounts to $6,000. The difference in strategies results in Cadmium incurring an additional $8,000 (for the extra days) on top of its already higher daily costs. However, the calculation provided was incorrect in considering the comparison directly as an additional cost. The correct approach is to focus solely on the extra days and costs Cadmium incurs, which is 10 days * $800/day = $8,000, not comparing the base costs of both companies directly. The explanation mistakenly introduced a comparison that isn't relevant to calculating non-value-added costs based on the extra inventory days alone.