Of the nine reasons for holding inventory listed in Exhibit 21-1, the first reason is directly
concerned with the trade-off between acquisition and carrying costs. Most of the
other reasons are concerned directly or indirectly with stock-out costs, with the exception
of the last two (which are concerned with managing the cost of the good itself).
Initially, we will assume away the stock-out cost problem and focus only on the objective
of balancing acquisition costs with carrying costs. To develop an inventory policy
that deals with the trade-offs between these two costs, two basic questions must be
addressed