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The carrying cost of inventory is the cost a business pays for holding goods in stock. It is calculated by dividing the total inventory value by the total cost of storing those goods, and is usually expressed as a percentage.

The carrying cost of inventory includes taxes, employee costs, depreciation, insurance, the cost to keep items in storage, opportunity costs, the cost of insuring and replacing items, and the cost of capital that helps produce income for a business.

For example, a company that sells art supplies carries many items in its inventory, including paint, paintbrushes, easels, canvases, boards and so on. To figure its carrying cost of inventory, it adds every cost it pays to store the items. The total is $150,000.

The company has a total inventory value of $600,000, making the company’s carrying cost of inventory 25%. The company pays 25 cents for every dollar worth of inventory it holds over a given time period.

Management uses its carrying cost of inventory to determine how much inventory to keep on hand, and whether the company should increase production. It is also used when calculating the profit to be gained from current inventory.

Inventory is frequently both a firm’s largest asset and expense. Businesses must balance the carrying cost of inventory with the risk of not being able to fulfill customer requests in a timely manner.

Carrying cost of inventory is also referred to as inventory cost or carry cost of inventory.

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