Business Degree Certification Practice Test

As order size increases, what happens to ordering and carrying costs?

1. Ordering costs decrease, carrying costs increase

2. Ordering costs increase, carrying costs decrease

3. Both ordering and carrying costs increase

4. Both ordering and carrying costs decrease

The correct answer is: Ordering costs decrease, carrying costs increase

As the size of orders increases, ordering costs tend to decrease because fewer orders need to be placed overall. This reduction occurs because ordering costs typically include costs related to processing the purchase order, shipping, and receiving the goods. By increasing the size of each order, a business can spread these costs over a larger number of units, thereby reducing the average cost incurred per unit ordered. On the other hand, carrying costs increase with larger order sizes. Carrying costs refer to the expenses associated with holding inventory, which can include warehousing costs, insurance, spoilage, and taxes. When a company orders larger quantities, it retains more inventory on hand, which naturally leads to higher carrying costs since more resources are allocated toward storing and managing that inventory. In summary, with larger order sizes, businesses see a reduction in ordering costs and an increase in carrying costs, making the first choice the correct one.