A company's annual cost of goods sold is $350 million, and inventory carrying cost is 18%. The company averages four inventory turns. The cost savings resulting from increasing inventory turns from four to six would be:
This question confuses me because theoretically if you increased inventory turns carrying costs would increase by a fixed amount not a percentage. There would be more handling and administrative costs... 18% per dollar wouldn't make a difference.
Carrying costs decrease because you're paying the same costs for warehouse, insurance but reducing the obsolescence, shrinkage since your inventory is moving faster. And from the formula, a higher inventory turnover means less average inventory, assuming the COGS remains same.
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