Question

High inventory levels increase the ________.*

A) cost of carrying inventory the costs of quality, and shrinkage costs
B) revenues and expected profits
C) cost of equity, cost of debt, and cost of short-term funds
D) cost of materials, the costs of overhead, and opportunity costs

Answer 1

High inventory levels lead to an increase in the cost of carrying inventory, costs of quality, and shrinkage costs. These higher costs can adversely affect a firm's profitability by increasing the total costs associated with inventory management. The correct option is A.

Step-by-step explanation:

The student's question asks about the effects of high inventory levels on a business's costs. High inventory levels increase the cost of carrying inventory, the costs of quality, and shrinkage costs. The correct answer to the question is A) cost of carrying inventory, the costs of quality, and shrinkage costs.

Carrying large amounts of inventory can lead to increased storage costs, higher insurance premiums, and potential obsolescence or spoilage of products. Furthermore, it introduces higher shrinkage costs due to loss, theft, or damage.

Firms should balance the need to have enough inventory to satisfy demand with the desire to minimize these associated costs.

Typically, the cost of equity, cost of debt, and cost of short-term funds (Option C) are related to the financial structure and financing decisions of a firm rather than inventory levels. Similarly, while the cost of materials, overhead, and opportunity costs (Option D) are affected by production volume, they aren't directly caused by higher inventory levels. The correct option is A.