Your current inventory of rebar costs $45,000 and turns over 6 times per year. What is your annual inventory carrying cost if the carrying cost rate is 25%?
Correct Answer
A) $11,250
Annual carrying cost = Average inventory value × Carrying cost rate = $45,000 × 25% = $11,250. The inventory turnover rate affects total material costs but not the carrying cost calculation on current inventory.
Why This Is the Correct Answer
The annual inventory carrying cost is calculated by multiplying the current inventory value by the carrying cost rate. With $45,000 in current inventory and a 25% carrying cost rate, the calculation is straightforward: $45,000 × 0.25 = $11,250. The inventory turnover rate of 6 times per year is additional information that doesn't affect this specific carrying cost calculation. Carrying costs are based on the value of inventory you're holding at any given time, not how often it turns over.
Why the Other Options Are Wrong
Option C: $1,875
$7,500 seems to be calculated using an incorrect rate, possibly 1/6 of the inventory value, which confuses turnover rate with carrying cost rate.
Option D: $7,500
$1,875 appears to be the result of incorrectly dividing the correct answer by 6 (the turnover rate), which is not part of the carrying cost formula.
Memory Technique
Remember 'CIC': Current Inventory × Carrying rate = Carrying cost. The turnover rate is a red herring - carrying costs are about what you're holding now, not how fast it moves.
Reference Hint
Look up 'Inventory Management' or 'Construction Business Management' chapters for carrying cost formulas and inventory control concepts.
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