Question

Describe and evaluate the elements of the carrying cost of inventory and how it relates to inventory levels and capital investment. How does ABC inventory stratification affect the carrying cost equation

Answer 1

1. The elements of the carrying cost of inventory include the following:

1. Capital cost
2. Inventory service cost
3. Inventory risk cost
4. Storage space cost.

2. The relationship between the carrying cost of inventory and the inventory levels and capital investment is shown by the Economic Order Quantity (EOQ) Model.

The EOQ model defines that there will be an increased carrying cost of inventory when the inventory order is above the EOQ level, which also results in increased capital investment for the purchase of inventory that is kept in stock for a long period.

Thus, the carrying cost of inventory and the inventory levels and capital investment have a linear relationship.  When one element increases, the other two elements will also increase.

3. ABC Inventory stratification helps management to reduce the carrying cost equation since it divides the inventory into many classifications to ensure the matching of inventory levels based on their annual requirements or demand.

What is inventory?

Inventory refers to the stock of goods that a company holds at the end of the trading period because it has remained unsold to outside parties.

Inventory is one of the current assets used in determining the current ratio.

Learn more about inventory carrying costs at brainly.com/question/16395657