What are some costs associated with high inventories? With low inventories?

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What are some costs associated with high inventories? With low inventories?

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What are some costs associated with high inventories? With low inventories?

Explanation & AnswerSolution by a verified expert

Explanation

Costs associated with high inventories-

Carrying excessive inventories leads to an increase in financing and holding costs of inventory.
Excessive inventory requires more labor to manage it which leads to an increase in labor costs.
Carrying excessive inventory results in more inventory risk costs because the items stored in the warehouse carries a risk component that the items stored may fall in market value.

 
Costs associated with low inventories-

Carrying lower inventories increases the ordering costs as inventories are ordered frequently.
Lower inventory increases out of stock costs. Out of stock costs are the losses borne by the company because of lower inventory and missed sales opportunities.

Verified Answer

The higher inventory level results in increased holding cost, labor cost and damage cost.
However, having a lower inventory level results in an increased ordering cost.

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