Question

Which of the following statements about inventory are true?

A. The most important cost arising from inventory is usually the holding cost.
B. Increasing inventory leads to a decline in net working capital.
C. The cost of financing the inventory is usually significantly larger than the holding cost.
D. Inventory levels are determined as the trade-off between losing the margin on additional sales and the costs of excess inventory.

Answer 1

D. Inventory levels are determined as the trade-off between losing the margin on additional sales and the costs of excess inventory.

Step-by-step explanation:

Option B is wrong because net working capital = current assets - current liabilities, and inventory is a current asset.

Options A and C may or may not be true depending on the company's costs. Holding costs include storage costs, insurance, damaged goods or even spoilage. Depending on the industry, e.g. dairy products, they might be larger than financing costs. But for other industries, e.g. microchips, holding costs are probably much lower than financing costs (a lot of small but expensive goods).