Which of the following is typically the largest component of inventory costs for a merchandising company?

• A. Cost of goods purchased
• B. Storage costs
• C. Inventory shrinkage
• D. Freight-in costs

Answer: (A)

Verified step by step guidance

1. Understand the nature of inventory costs for a merchandising company. Inventory costs typically include all costs incurred to bring goods to a sellable condition and location.
2. Review the components listed in the problem: Cost of goods purchased, Storage costs, Inventory shrinkage, and Freight-in costs. Each represents a different type of cost associated with inventory.
3. Recognize that for a merchandising company, the largest component of inventory costs is usually the cost of goods purchased. This is the direct cost of acquiring inventory from suppliers, which forms the bulk of the inventory value.
4. Consider the other components: Storage costs refer to expenses for storing inventory, Inventory shrinkage accounts for losses due to theft or damage, and Freight-in costs are transportation costs incurred to bring inventory to the company. These are typically smaller in comparison to the cost of goods purchased.
5. Conclude that the cost of goods purchased is the largest component because it represents the primary expense in acquiring inventory for resale, while the other costs are secondary or supplementary.