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What is the relationship between changes in inventory carrying costs and average inventory?

Inventory carrying costs relate to costs the company incurs to store or hold inventory in their warehouse. This can include costs such as warehouse rent, utilities for the warehouse, shrinkage (loss of inventory), and insurance.

So if the company believes inventory carrying costs are going to increase, then they would want to decrease the average inventory in the warehouse. If the company believes inventory carrying costs may decrease, then they could increase average inventory in the warehouse.

There are other factors that impact the company’s average inventory balance like lead time, costs of placing an order, and product demand.

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