CMA Intermediate · Financial Management and Business Data Analytics · Inventory Management
Himalaya Foods holds average inventory of Rs 8,00,000. Its annual carrying costs are: storage Rs 24,000, insurance Rs 16,000, obsolescence Rs 40,000, and the firm's cost of funds is 12% per annum. What is the carrying cost as a percentage of average inventory value?
Carrying cost is 22% of average inventory. Financing cost is Rs 96,000 (12% of Rs 8,00,000) and storage, insurance and obsolescence add Rs 80,000, giving Rs 1,76,000. Dividing by Rs 8,00,000 yields 22%.
- A10%
- B12%
- C20%
- D22%Correct
Explanation
Interest on funds = 12% x 8,00,000 = Rs 96,000. Other costs = 24,000 + 16,000 + 40,000 = Rs 80,000. Total = Rs 1,76,000, which is 22% of 8,00,000. Ignoring the financing cost gives 10%.
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