CPIM Practice Exam

Which cost is affected by a decrease in order quantity?

1. Annual cost of carrying inventory

2. Cost of ordering

3. Cost of manufacturing operations

4. Cost of customer service

The correct answer is: Annual cost of carrying inventory

A decrease in order quantity directly impacts the annual cost of carrying inventory. When order quantities are reduced, more frequent orders typically occur to maintain inventory levels, resulting in a higher average inventory level. Because carrying costs are related to the amount of inventory held, a smaller order quantity leads to lower average inventory levels, which in turn reduces the costs associated with storing and managing that inventory. The carrying cost includes expenses such as warehousing, depreciation, insurance, and the cost of capital tied up in inventory. Therefore, when reducing order quantity, the carrying costs decrease because there is less inventory stored over time, leading to a savings in these areas. The other costs mentioned, such as ordering, manufacturing operations, and customer service, do not have a direct relationship with the decrease in order quantity in the same way that carrying costs do. For example, while ordering costs might fluctuate, the immediate effect observed with decreasing order quantities is most notable in carrying costs.