The local distributor anticipates selling around 9,600 steel belted radial tires over the next year. The carrying cost is an important factor to consider in this context. Specifically, an annual carrying cost of $16 per tire means that the distributor must account for the additional expenses involved in storing and maintaining the inventory of tires.
When we talk about carrying costs, we’re referring to the expenses associated with holding inventory. This includes costs like storage, insurance, depreciation, and potential obsolescence of the product. If we multiply the number of tires by the carrying cost, we find:
Total Carrying Cost = Number of Tires × Carrying Cost per Tire
So, in this case:
Total Carrying Cost = 9,600 × $16 = $153,600
This means that the local distributor needs to budget approximately $153,600 just for the carrying costs of the inventory next year. It is crucial for businesses to manage this cost efficiently, possibly by optimizing inventory levels, improving supply chain processes, or negotiating better terms with suppliers. The more effectively they manage carrying costs, the higher their potential profit margins will be.