# Marginal Cost of Storage vs. sum of storage cost

I'm working on a model for inventory management. I'm trying to decide for each unit if it is worth holding, or if it should be liquidated at a cost $$x$$.

I'm wondering about the argument that marginal holding cost for any unit are 0, because the warehouse is there, the unit is there, etc., so there is no real cost of holding an additional unit in the warehouse other than cost of capital, with the exception that the last units that fit in start creating opportunity cost.

That seems intuitively right, but brings me to the problem that I have the incentive of keeping stock with extremely high reaches - which seems intuitively wrong.

Am I missing something? Is it "mathematically" correct to assume the first unit in the warehouse has all the marginal cost of the entire warehouse cost? How can I model this correctly? Is there literature on this?

• I think it is related to the "Opportunity Cost". If you do not hold inventory, but use the money to investment. Assume that the investment return is 5%, then we can say the marginal cost of storage is 5%. Furthermore, higher inventory requires larger warehouses which can also incur the opportunity cost. May 19, 2022 at 13:18
• I think there is opportunity cost if you run out of space to buy more , and there is cost of capital which might be viewed as opportunity cost as well. What I’m unsure about is how to get to marginal cost at a state where the warehouse isn’t full
– Jan
May 19, 2022 at 15:23