Inventory costs should be considered to determine whether a firm should order enough to qualify for a volume discount.
Inventory costs consists of ordering costs, carrying costs and shortage costs. Inventory is an important asset for a company or a manufacturer. Ordering cost includes cost of purchase and the cost of inbound logistics. In order to minimize the ordering cost of inventory we make use of the concept of Economic Order Quantity.
Carrying cost of inventory refers to the cost sustained towards inventory storage and maintenance. Shortage costs and the cost of recovery are the costs that take place in unexpected circumstances. The costs which is involved in holding the inventory are called Holding Costs.
To achieve the volume discount a firm has to make big orders. Calculations and tracking of these inventory costs will enable the company whether they are able to manage such big orders to qualify for volume discount or not.
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