Final answer:
The carrying cost of in-transit inventory will rise if the cost of capital increases, as the cost of capital is part of the opportunity cost of holding inventory. Additionally, increased production costs may result in higher product prices to preserve profit margins.
Step-by-step explanation:
When the cost of capital for a firm increases, the carrying cost of in-transit inventory is expected to rise as well. In-transit inventory carrying costs include the expenses associated with storing and moving goods that have not yet reached their final destination, typically measured as a percentage of the inventory value. Since the cost of capital represents the opportunity cost of funds tied up in inventory, an increase in this cost directly translates to an increased carrying cost.
An increase in the cost of production requires a consequential rise in the price of the product to maintain the desired profit margin. Furthermore, as a firm increases output, it requires larger quantities of inputs, which elevates costs. Should an input become more expensive, firms may respond by adjusting their production technology to remain efficient and cost-effective.