Graphically depict shortage costs, carrying costs, and the total cost curve showing the optimal investment in current assets (Costs on the vertical axis, current assets on the horizontal axis.) Be sure to label the optimal level of current assets. Using the same format, illustrate what a flexible short-term financing policy looks like and also illustrate what a restrictive policy looks like.

Shortage Costs

Expenses incurred from the unavailability of inventory or resources, leading to missed sales or production delays.

Carrying Costs

The expenses incurred by holding inventory, including storage, insurance, and taxes.

Current Assets

Assets owned by a company that are expected to be converted into cash, sold, or consumed within one year or within the normal operating cycle of the business, whichever is longer.