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B. Option A
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What is the annual carrying cost, stated as a percentage of investment in inventory, that would be used in model?
A. 34%
B. 22%
C. 42%
D. 37%
Answer: C
Explanation:
The annual carrying costs are US $12,750 for the warehouse, US $1,500 for insurance, II and US $2,260 for proper taxes. These costs total US $16,500. In addition, the company desires a 12% after-tax return on investments. Because the tax rate is 40%, the 12% aftertax return equals a 20% before-tax return 12% - 60%). A 20% return on the US $75,000 average investment in inventory is US $15,000. Hence, the total carrying cost is US $31,500 $16,500 + $15,000). This amount is 42% of the US $75,000 investment in inventory.


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