A company keeps 15 days of materials inventory on hand to avoid shutdowns due to materials shortages. Carrying costs average £5,000 per day. A competitor keeps 12 days of inventory on hand, and the competitor's carrying costs average £3,000 per day. The value-added costs are
A) £5,000.
B) £-0-.
C) £30,000.
D) £75,000.

Question

Quizplus · Accepted Answer

The question is asking for the value-added costs, which means we need to look at the difference in carrying costs between the two companies. The competitor's carrying costs are £2,000 less per day than the company's carrying costs. Therefore, if the company reduced their inventory to match the competitor's level, they would save £2,000 per day, or £30,000 over 15 days. This means the value-added costs are £-0-, as reducing inventory levels would lead to cost savings.

A Company Keeps 15 Days of Materials Inventory on Hand