David answered on
Dec 27 2019
1) Components of inventory ca
ying cost is considered as a crucial component in determining supply chain decision and overall profitability aspect as well. In general terms, inventory ca
ying cost is understood as cost or expenses incu
ed on storing and holding inventory for certain period of time by a business firm. There are four main components of inventory ca
ying cost-capital cost, storage space cost, inventory service cost, and inventory risk cost. Capital cost is concerned with the cost that a business firm expends in ca
ying inventory. For example, if a business firm claims that capital cost is 30 percent of its total inventory cost, and total inventory cost is estimated $9000, then capital cost is $2700 (Franke, 2010).
Secondly, storage space cost includes warehouse rent, lighting, heating, and handling cost incu
ing in moving materials in and out of the warehouse. Some part of storage space cost is fixed, such as rent or mortgage, while lighting, heating, etc are variable. Thirdly, inventory service cost is the cost of ca
ying inventory, such as insurance and taxes. Lastly, inventory risk cost is concerned with risk component as stored goods always contain the risk that their real value may fall in the coming time. For example, stored goods may become obsolete or superseded by launch of new version.
Opportunity cost is the estimated return on potential investments compared with the expected return on present investments. There are two approaches for determining opportunity cost components-financial & non-financial. In financial approach, relative risks are measured for choosing one investment option over another while non-financial does not only takes into account monetary concerns, but also other resources such as time and labour. Among the two approaches, non-financial approach is recommended as time, labour and other resources also play crucial role along with monetary concerns. There is several investment options which pose great potential in terms of monetary terms, but likely to incur huge time and labour. At this point, it becomes necessary to measure and compare investment options on all grounds-return or money, time, and labour (Ofuoku, 2009).
The evaluation of investment option merely on the ground of monetary or return concern could result in selecting wrong investment decision. Opportunity cost is having great implication on supply chain...