Question

The following are the reasons for firms to hold stock of inventories except:

• A. To meet future demand for goods.
• B. It is more costly for a firm to order goods less frequently in large quantities than to order small quantities frequently.
• C. To smoothen the production process.
• D. Some inventories are held as an unavoidable part of the production process.

Hint:

Large, infrequent orders are typically cheaper due to economies of scale, which help reduce the per-unit cost.

Answer 1

The Correct Option is B

Step 1: Reasons for holding inventories.
Firms hold inventories for reasons such as meeting future demand, smoothing production, or dealing with uncertainties in supply.

Step 2: Analysis of options.
- (A) To meet future demand for goods: This is correct. Firms hold inventories to ensure they can meet customer demand even when production is not immediate.
- (B) It is more costly for a firm to order goods less frequently in large quantities than to order small quantities frequently: This is incorrect. Generally, ordering goods in large quantities less frequently is more cost-effective due to economies of scale.
- (C) To smoothen the production process: This is correct. Inventories help to ensure a smooth production process by ensuring that raw materials and components are available when needed.
- (D) Some inventories are held as an unavoidable part of the production process: This is correct. Certain inventories are needed for production, such as work-in-progress inventory.

Step 3: Conclusion.
The incorrect statement is (B), as ordering in bulk is typically cheaper than ordering in smaller quantities frequently.