Why does a higher order quantity typically lead to a higher holding cost in inventory management?

• A. Because holding costs are fixed and do not depend on the order quantity.
• B. Because suppliers charge a higher price per unit for larger orders.
• C. Because ordering more units increases the average inventory held, which raises the total cost of storing goods.
• D. Because higher order quantities reduce the frequency of orders, lowering holding costs.

Answer: (C)

Verified step by step guidance

1. Understand that holding cost in inventory management refers to the cost of storing unsold goods, which includes expenses like warehousing, insurance, depreciation, and opportunity cost of capital.
2. Recognize that holding cost is generally proportional to the average inventory level, meaning the more units you keep in stock on average, the higher the total holding cost will be.
3. Note that when you order a higher quantity at once, your inventory level increases immediately after the order arrives, leading to a higher average inventory over time compared to ordering smaller quantities more frequently.
4. Recall the formula for average inventory when ordering in batches: \(\text{Average Inventory} = \frac{Q}{2}\), where \(Q\) is the order quantity, showing that average inventory (and thus holding cost) rises as \(Q\) increases.
5. Conclude that because holding costs depend on the amount of inventory stored, ordering more units at once increases the average inventory held, which in turn raises the total holding cost.