Logiwa Resource
Carrying Cost of Inventory Calculator
eating into your profit margins.
Carrying Cost of Inventory Formula:
Using the formula
Carrying Cost % Example
Let’s assume the following values for a company’s inventory:
- Total Carrying Costs (e.g., warehousing, insurance, obsolescence) for the year: $15,000
- Average Inventory Value (e.g., the average value of inventory held throughout the year): $50,000
Calculation
We apply the formula using these values:
The result is a 30% Inventory Carrying Cost Percentage. This means that it costs the company $0.30 per year to hold $1.00 worth of inventory.
Inventory Carrying Cost Calculator
Explanation of
the formula
Think of it this way: every product sitting on your shelf is costing you money beyond what you paid for it. This metric bundles all those hidden costs—like storage rent, insurance, employee salaries, taxes, and potential losses from damage or obsolescence (products becoming outdated)—into a single, crucial percentage.
Tracking your carrying cost percentage is essential for managing profitability. This “cost of holding” directly eats into your profit margins.
If it costs you 25% to hold an item for a year, you must ensure your profit margin is significantly higher than 25% just to break even on that item. Knowing this number helps you make critical business decisions:
- Pricing: Should you raise prices to cover these costs?
- Inventory Policy: Are you ordering too much at once? Would it be cheaper to order smaller batches more frequently?
- Cost Reduction: Where are the costs coming from? Is your insurance too high, or is your warehouse inefficient?
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