Question

Which TWO of the following are included in the costs of holding inventory?

a) Interest on capital held in tied up inventory
b) The costs of ordering replacement inventory
c) The cost of insurance
d) Emergency orders

Answer 1

Costs of holding inventory include interest on tied-up capital and insurance costs. These expenses are associated with the capital that is not being used elsewhere and the protection of inventory against potential losses.

Step-by-step explanation:

Two costs associated with holding inventory include the interest on capital that is held in tied-up inventory and the cost of insurance to protect that inventory. When a company holds inventory, it represents capital that is not being used elsewhere in the business, which could otherwise be earning interest. This opportunity cost of capital is a major expense in holding inventory. Additionally, the inventory must be insured to protect against losses such as theft, fire, or other damage, which is another significant cost incurred by businesses that maintain inventory levels.