Mendelsohn company keeps 20 days of materials inventory on hand to avoid shutdowns due to materials shortages. Carrying costs average $4,000 per day. Bach, Inc., a competitor, keeps 10 days of inventory on hand, and the competitor's carrying costs average $2,000 per day.
The value-added costs are
A)$0.
B)$40,000.
C)$20,000.
D)$80,000.

Question

Quizplus · Accepted Answer

Value-added costs refer to the costs associated with activities that increase the value of a product or service to the customer. Keeping inventory on hand to avoid shutdowns does not directly add value to the product or service from the customer's perspective; it is a non-value-added activity aimed at ensuring production continuity. Therefore, the costs associated with maintaining inventory levels in this context are considered non-value-added costs, making the value-added costs $0.

Mendelsohn Company Keeps 20 Days of Materials Inventory on Hand