Cost of carrying inventory
Carrying material in inventory is expensive. A number of studies indicated that the annual cost of carrying a production inventory averaged approximately 25% of the value of the inventory. The escalating and volatile cost of money has escalated the annual inventory carrying cost to a figure between 25% – 35% of the value of the inventory. The following five elements make up this cost:
1)Â Â Â Â Â Opportunity cost (12% -20%)
2)     Insurance cost (2% – 4%)
3)Â Â Â Â Â Property taxes (1% – 3%)
4)Â Â Â Â Â Storage costs (1%- 3%)
5)Â Â Â Â Â Obsolescence and deterioration (4% – 10%)
Total carrying cost (20% – 40%)
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