There are two types of inventory costs in Music2Go.
Inventory Holding Cost
Each year all firms are charged 3.5% of the value of their average closing inventory for inventory holding costs to cover the cost of warehousing etc.
For instance, if you have 1 million units of unsold stock at the end of the year at a cost of $40 per unit, then you have $40 million of inventory which will cost:
3.5% *$40 million = $1.4m in holding cost
Inventory Disposal Loss
If a firm updates a product with a new design or abandons it altogether then all existing inventory is dumped at 93.5% of what the firm paid for it.
$1 million of inventory would be dumped for $935K giving a loss of $65K.
You can gather some valuable market research from looking at the figures for your competitors. Firms that have no inventory holding costs have stocked out, because they are under forecasting demand for their products. Firms with large inventories are over forecasting demand. If you see any inventory disposal costs, then you know that your competitor has either updated an existing product’s design or abandoned one.
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