Legal Definitions - cost of carrying

Definition: The cost of carrying refers to the variable cost of stocking one unit of inventory for one year. It includes the opportunity cost of the capital invested in the inventory.

Example: A company that produces and sells shoes has to keep a certain amount of inventory in stock to meet customer demand. The cost of carrying includes the expenses incurred in storing the shoes, such as rent, utilities, insurance, and taxes. It also includes the opportunity cost of the capital invested in the inventory, which is the return the company could have earned if it had invested the money elsewhere.

Explanation: The example illustrates how the cost of carrying is calculated for a company that has to maintain inventory. The cost of carrying is an important factor in determining the profitability of a business, as it affects the company's cash flow and working capital. By minimizing the cost of carrying, a company can improve its bottom line and increase its competitiveness in the market.