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Q. 20-3DQ-b

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Operations And Supply Chain Management
Found in: Page 543
Operations And Supply Chain Management

Operations And Supply Chain Management

Book edition 14th
Author(s) F. Robert Jacobs
Pages 800 pages
ISBN 9780078024023

Short Answer

Discuss the nature of the costs that affect inventory size. For example b. How does obsolescence contribute to the cost of carrying inventory? How can this cost be reduced?

Three expenses influence inventory size: purchase costs, ordering costs, and holding costs.

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Step by Step Solution

The nature of the costs that affect inventory size

Based on the quantity ordered, the purchase cost influences the inventory size. Discounts are given based on the amount bought, which implies that suppliers will give companies a substantial discount if they place a large order. It also aids in growing the amount of inventory. The optimum order quantity is directly affected by the ordering cost, i.e., if the ordering cost increases, the order frequency decreases. The holding cost harms inventory size; if the holding cost is large, the company will choose to store less inventory.

Obsolescence contributes to the cost of carrying inventory

Inventory risk expenses include inventory that loses value while being kept as a result of product deterioration or outmoded products that are no longer in demand from consumers. As a result, they must be sold at a reduced market value. Obsolescence refers to a decrease in the value of an asset caused by a lack of usefulness or technical causes. This can be lowered by changing or updating the attributes of the items, allowing them to remain in the market.

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