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. The nonvalue-added costs for the company are
A) £80,000.
B) £40,000.
C) £20,000.
D) £-0-.

Question

Quizplus · Accepted Answer

The nonvalue-added costs for the company is the difference in carrying costs between the company and the competitor multiplied by the number of days the company keeps more inventory, which is (4000-2000) * 20 = £80,000. Therefore, the best choice is A.

A Company Keeps 20 Days of Materials Inventory on Hand