CPIM Practice Exam

If the order quantity increases while demand levels remain constant, what happens to the carrying costs?

1. Ordering costs increase.

2. Average inventory levels decrease.

3. Carrying costs increase.

4. Economic order quantity shifts.

The correct answer is: Carrying costs increase.

When the order quantity increases while demand levels remain constant, the average inventory level in the system typically rises since more inventory is being held on hand. Carrying costs are directly associated with holding inventory, encompassing expenses such as storage, insurance, depreciation, and opportunity costs tied to the capital tied up in inventory. As the average inventory level increases due to a larger order quantity, the total carrying costs will also rise, reflecting the increased volume of goods stored. This relationship is fundamental in supply chain management and inventory control, indicating that higher levels of inventory directly correlate with higher carrying costs. It's crucial for effective inventory management to monitor and optimize order quantities to manage these costs effectively. This scenario does not inherently cause ordering costs to rise, nor does it affect the economic order quantity unless other factors such as lead times or demand variability come into play. Similarly, average inventory levels will not decrease with an increase in order quantity; they will rise, thereby adding to carrying costs.