Reference no: EM132564306

Broton and Sinister own and manage Cash and Carry, a roadside café and service station located on a main highway on the way to the snow fields in the Pacific Alps. Cart and Carry services the tourist traffic each year and in addition, it supplies to the local community small car parts such as tyres, tubes, radiator hoses, fanbelts, spark plugs, bulbs, fuses and so on.

As the cost of purchasing stock has risen inexorably year after year and stockholding costs have also risen, Esther has posed the question whether such large stocks are worth keeping. Joan argues that they have a reputation for 'nearly always having the part needed'. She says this is a reputation worth having.

Esther counters that with the argument that they are often left with stock that they have especially ordered after customers 'forget' to return. Sometimes the orders are for special parts that are not generally in demand.

Required

Question a. What are the investment issues here? Explain in terms of risk, opportunity costs and finance.