When these components change with i

When these components change with inventory levels, so does the holding cost.Companies usually state an item’s holding cost per period of time as a percent of its value. The annual cost to maintain one unit in inventory typically ranges from 15 to 35 percent of its value. Suppose that a firm’s holding cost is 20 percent. If the average value of total inventory is 20 percent of sales, the average annual cost to hold inventory is 4 percent [0.20(0.20)] of total sales. This cost is sizable in terms of gross profit margins, which often are less than 10 percent. Thus, the components of holding cost create pressures for small inventories.