A contractor maintains an inventory of electrical conduit with an average value of $45,000. If the annual carrying cost rate is 18% and the inventory turns over 6 times per year, what is the annual carrying cost?
Correct Answer
B) $8,100
Annual carrying cost = Average inventory value × Carrying cost rate = $45,000 × 18% = $8,100. Inventory turnover affects how long materials are held but doesn't directly change the carrying cost calculation.
Why This Is the Correct Answer
The annual carrying cost is calculated by multiplying the average inventory value by the carrying cost rate. This gives us $45,000 × 18% = $8,100. The inventory turnover rate of 6 times per year is additional information that doesn't affect this basic carrying cost calculation. Carrying costs are typically expressed as a percentage of the average inventory value held throughout the year.
Why the Other Options Are Wrong
Option A: $6,750
$6,750 would result from incorrectly using 15% instead of 18% as the carrying cost rate ($45,000 × 15% = $6,750)
Option C: $7,500
$7,500 would result from incorrectly using 16.67% instead of 18% as the carrying cost rate, possibly from confusion with the inventory turnover calculation
Option D: $9,000
$9,000 would result from incorrectly using 20% instead of 18% as the carrying cost rate ($45,000 × 20% = $9,000)
Memory Technique
Remember 'AIC' - Average Inventory × Carrying rate = annual carrying Cost. The turnover is a red herring that doesn't affect the basic carrying cost formula.
Reference Hint
Look up inventory management and carrying costs in construction business management chapters, typically found in project management or business operations sections
More Business & Finance Questions
A contractor's license expires on March 31st. If they submit a renewal application on April 15th, what additional requirement must be met under Florida regulations?
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
In Florida, what is the minimum workers' compensation insurance coverage required for construction companies with employees?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?