What impact would meeting this goal have on profit?

A company would like to reduce its inventory. The firm’s investment in inventory represents 12% of the company’s $11 million total assets. The inventory carrying cost is 20%. An inventory reduction of $1 million is considered a feasible goal.

What impact would meeting this goal have on profit?
A . $240,000
B . $200,000
C . $120,000
D . $220,000

View Answer

Answer: B

Explanation:

Reducing inventory by $1 million with a carrying cost of 20% results in savings of $200,000. This reduction directly impacts profit by decreasing the costs associated with holding inventory.

Reference: Inventory management principles highlight the significance of inventory reduction in improving profitability through lower carrying costs. Calculation: $1,000,000×0.20=$200,000$1,000,000 times 0.20 = $200,000$1,000,000×0.20=$200,000.