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Why do we assume holding costs changes with the number of units? Surely, the units will be stored in a warehouse and no matter the number of units, we will still have to pay the same amount for the warehouse. What am I missing?
Two things.
Firstly holding more units in the warehouse will need more space and more space might well mean more cost (especially if the space is rented).
Secondly, and more importantly, warehouse space is only one of the costs involved in holding inventory. One of the most important costs is the interest cost of the money tied up in inventory. The more inventory being held, the more money is tied up in inventory and therefore the more interest cost (because the money paid for the inventory could have been earning interest were it still in the bank, or would be costing interest if the money was being borrowed).
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