Increased production setup costs and premium transportation

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Reference no: EM13714312

(a) Using the following information, calculate the inventory carrying cost percentage.

(b) Would it be a good decision to spend $850,000 per year in increased production setup costs and premium transportation costs in order to achieve an inventory reduction of 12%?

Finished goods inventory is $40 million at full manufactured cost.
Variable manufactured cost of inventory is 60% of full manufactured cost.
Variable transportation cost was $2 million.
Variable warehousing cost to move inventory into storage was $320,000.
The company was experiencing capital rationing and required that new investments earn at least 25% before taxes.
Personal property taxes paid on inventory were approximately $220,000.
Insurance coverage to protect against loss of inventory was $125,000.
Storage charges at public warehouses totaled $400,000.
Obsolescence was $90,000.
Theft of inventory was $85,000.
Damage related to inventory storage was $45,000.
Transportation cost of cross-shipping inventory to avoid obsolescence was $35,000.

Reference no: EM13714312

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