Question

True/False

a. Although inventory is viewed as an asset on the balance sheet, holding excessive amounts of inventory can erode firm value.

b. The transactions motive for holding inventory revolves around the idea of being able to take advantage of unforseen circumstances.

c. The total cost of inventory is a linear relationship that is a function of the cost of ordering inventory and the cost of holding inventory.

d. Safety stock can be used to reduce risk associated with using the EOQ model.

Answer 1

a.

Answer: true

Higher amount of inventory reduces a firm value in a sense that products are not being sold out because of loosing demand in the market.

b.

Answer: true

The motive of holding is to cope up with future uncertainties like, price fluctuation, sudden increase in demand of product, and non-stoppage of production at any time.

c.

Answer: false

Cost of inventory holding is a linear function but cost of ordering is non-linear.

d.

Answer: false

The extra stock that reduces the risk of out-of-stock is safety stock. The risk of EOQ is not considering future demand fluctuations, which can’t be tackled through safety stock.