Question

In general, as the order size increases,

a) ordering costs decrease and carrying costs increase
b) ordering costs increase and carrying costs decrease
c) both ordering and carrying costs increase
d) both ordering and carrying costs decrease

Answer 1

As order size increases, ordering costs typically decrease due to economies of scale, while carrying costs increase due to additional storage and handling requirements. The correct answer is A.

Step-by-step explanation:

The question asks about the relationship between order size and the associated ordering costs and carrying costs within the context of a business operation. When a company increases its order size, the ordering costs, which include costs related to procuring products or raw materials, typically decrease because of economies of scale. Fewer orders mean less administrative work and potentially better rates from suppliers.

On the other hand, carrying costs, which are expenses related to storing and handling inventory, generally increase as more inventory is held. This increase is due to the need for more storage space, higher insurance costs, and the risk of wastage or obsolescence. Therefore, as the order size increases, option a) 'ordering costs decrease and carrying costs increase' is generally correct.