Legal Definitions - cost of carrying

The cost of carrying refers to the total expenses incurred by an individual or entity for holding onto an asset, inventory, or investment over a period of time. These costs are distinct from the initial purchase price and encompass various ongoing expenses necessary to maintain possession, preserve value, and finance the asset until it is sold, used, or otherwise disposed of.

• Example 1: Retail Inventory

  Imagine a large electronics retailer that purchases a significant volume of a new model of television, anticipating strong holiday sales. However, due to unexpected market shifts, a portion of these televisions remains unsold for several months after the holiday season. The retailer incurs costs such as warehouse storage fees for the unsold units, insurance premiums to protect against damage or theft, and the interest payments on the loan used to finance the initial purchase of the televisions. These ongoing expenses, paid simply to hold onto the inventory until it eventually sells, represent the cost of carrying.

• Example 2: Real Estate Investment

  Consider an investor who buys a vacant plot of land with the long-term goal of developing it into residential housing in five years. While waiting for the necessary permits and market conditions to align, the investor must pay annual property taxes, maintain liability insurance on the land, and potentially cover minor upkeep like clearing brush. If the investor financed the purchase with a loan, the monthly interest payments on that loan also contribute to the expenses. All these recurring payments, made simply to retain ownership of the undeveloped land, constitute the cost of carrying for this real estate asset.

• Example 3: Manufacturing Raw Materials

  A car manufacturer decides to purchase a bulk quantity of a specific type of steel, far exceeding its immediate production needs, to lock in a favorable price and hedge against future supply chain disruptions. This excess steel is stored in a dedicated facility. The manufacturer's cost of carrying for this steel includes the rent for the storage facility, the cost of insuring the steel against rust or damage, and the opportunity cost of the capital tied up in the steel that could have been invested elsewhere. These are the expenses directly attributable to holding the raw material until it is needed for vehicle production.