Final answer:
Holding costs are incurred when a business holds inventory before it is ready for sale. They include storage, insurance, and the opportunity cost of capital, and are crucial for inventory management and achieving economies of scale.
Step-by-step explanation:
When a business purchases inventory before it is ready for sale, such as component parts, certain costs may be incurred. The correct answer to this is OA. holding costs. These include expenses related to storing and preserving goods until they are ready to be sold. Holding costs can consist of storage fees, insurance, and opportunity costs related to capital being tied up in inventory rather than being used elsewhere. They are a part of inventory management and can impact a firm's overall profitability.
In contrast, OB. distribution costs would be related to the transportation of goods, C. processing costs refer to the costs tied to converting raw materials into finished products, and D. shrinkage represents the loss of inventory due to theft, damage, or errors.
In light of the provided information, managing inventory levels is crucial for businesses. The quantity of inventories sitting on shelves fluctuates based on business performance. Understanding and reducing holding costs can contribute to achieving economies of scale, where increasing the quantity of output decreases the cost per unit.