Answer (B) is correct . A firm’s economic order quantity is a function of demand, carrying costs, and ordering costs. A decrease in carrying costs permits a company to carry more inventory at the same cost and thereby reduce stockout costs.
Answer (A) is incorrect because Lower demand reduces the possibility of a stockout. Hence, the firm can carry a lower level of safety stock.
Answer (C) is incorrect because If demand can be predicted with greater accuracy, a stockout is less likely and safety stock can be reduced.
Answer (D) is incorrect because If carrying cost is constant, a reduction in the cost of a stockout justifies a smaller safety stock.
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