The correct answer is A. Reduction in ordering cost.
Inventory is a stock of goods and materials that a company holds to meet customer demand. It can be classified into three categories: raw materials, work-in-progress, and finished goods.
There are several benefits to carrying inventories, including:
- Avoiding lost sales: By having inventory on hand, a company can avoid lost sales due to stockouts.
- Reducing carrying cost: Carrying inventory incurs costs, such as storage costs, insurance costs, and obsolescence costs. By reducing the amount of inventory that is carried, these costs can be reduced.
- Avoiding production shortages: By having inventory on hand, a company can avoid production shortages due to unexpected demand or disruptions in the supply chain.
However, there are also some costs associated with carrying inventories, such as:
- Storage costs: Inventory must be stored in a warehouse or other facility. This can be a significant cost, especially if the inventory is bulky or perishable.
- Insurance costs: Inventory must be insured against loss or damage. This can be a significant cost, especially if the inventory is valuable.
- Obsolescence costs: Inventory can become obsolete if it is not sold within a certain period of time. This can be a significant cost, especially if the inventory is fashion-related or technology-related.
The optimal level of inventory to carry is a trade-off between the benefits and costs of carrying inventory. The company must decide how much inventory to carry in order to minimize the costs of carrying inventory while still meeting customer demand.
In the question, option A is not a benefit of carrying inventories because it is a cost associated with carrying inventories.