Question

Analyze the opportunity costs associated with excess inventory in both the automobile manufacturing plants and automobile dealerships.

Answer 1

The opportunity costs associated with excess inventory in both the automobile manufacturing plants and automobile dealerships are :

1) Carrying Cost: The cost of storage and godown expenses are to be borne by the company. It includes the rent of storage space and the security and damage cost of the inventory.

2) Interest Cost : The interest on the fund involved in the stores or inventory which are being kept in excess.

3) Profit loss : The excess of stores or inventory will show a slow sales of the company which will reduce the profitability of the company.

4) Deposit loss: The dealer has to put a deposit against the minimum order or sale of the product with the manufacturing companies. The dealer has a risk of losing the deposit of minimum orders due to slow sales and stocking of inventory.

5) Maintenance cost : The inventory which is stocked for the longer period will always calls for the maintenance costs which is over and above the direct cost like interest and rent.

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