Question

1. What, exactly, are “inventories”? What are the three ‘types,’ or areas, of inventories? 2. Why does a firm hold inventories? In theory, why did that hypothetical car company hold 400,000 cars?? Please discuss three reasons. 3. If our sales volume jumped wildly from month to month, why would it be difficult to match production volume with sales volume each month? 4. What will happen to our “400,000 cars, produced but not yet sold” inventory if, in theory, interest rates were to double, from, say, 10% to, say 20%? Why?

Answer 1

1):-Inventory is defined as a tangible resource that is held for resale in the normal course of operationsthree b) :-main types of inventory are:-

Raw materials that is all the items required to make the product

Works-in-progress are the Products that have been started, but not completed in the accounting period.

Finished goods are those Completed products that are ready for sale/consumption

2) :-Reasons for holding inventory by firm

1. It permits operations by providing time for manufacturing and distribution activities

2. ItIt develop operations by providing buffering between work centers and in supply chain

3.it meet customer demand by holding anticipation stock or cycle stock of products

4.it reduce risk of stock outs by holding of safety stock of components or products

5.it take advantage of quantity discounts creating larger volume orders for suppliers

6. It hedge against price increases by purchasing extra stock in anticipation of price changes