What are the benefits of holding inventories, Financial Management

Assignment Help:

Q. What are the Benefits of Holding Inventories?

(1) Timing of Demand and Supply: - Requirement to hold inventory of raw materials arises because it isn't possible for a firm to procure raw materials whenever it is needed. If the firm is guaranteed of supply of raw material without delay at the rate it is used in its manufacturing process it need not to hold stock of raw materials. However in actual practice a time lag exists between demand of raw materials in manufacturing process as well as its supply. Provider of raw material to the firm mat as well is delayed because of such factors as transport problems, strike, short supply etc. Thus the firm must maintain adequate inventory of raw material to run its manufacturing process regularly. Likewise need to hold inventory of finished goods arises because the rate of manufacturing and the rate of sale don't match. A firm can't manufacture the goods immediately on demand by customers.

(2) Quantity Discounts: - Raw materials are necessary as and when production process is run. However instead of procuring raw materials in small quantities at the time of each production run firm may purchase large quantities of raw material in advance to acquire quantity discounts of bulk purchasing. This results in a important saving in costs.

(3) Expectancy of Price Rise: - Anticipation of price rise may as well necessitate purchasing and holding of raw material inventories.

(4) Reducing Ordering Cost: - These costs comprise the cost of preparing transporting cost, purchase orders, receiving costs, inspecting costs etc.

These cost raise in proportion to number of order placed. Thus a firm may purchase raw materials in excess of its immediate requirements by placing one bulk order to reduce the ordering costs. This as well results in accumulation of raw material inventory.


Related Discussions:- What are the benefits of holding inventories

Role of banks in international trade transactions, Question 1 Internationa...

Question 1 International trade is the economic interaction among different nations involving the exchange of goods and services. Discuss the role of Banks in International Trade T

Determine primary variables being balanced in the eoq, What are the primary...

What are the primary variables being balanced in the EOQ (Economic Order Quantity) inventory model?  Explain The primary variables being balanced in the EOQ (Economic Order Quant

Definition of cost of capital, Definition of cost of capital In analyzi...

Definition of cost of capital In analyzing the cost of capital it is presumed that business risk of the firm remains unchanged (i.e., that projects accepted don't affect the va

What is coupon rate, What is Coupon Rate Coupon rate is the stipulated ...

What is Coupon Rate Coupon rate is the stipulated interest rate to be paid on the face value of a bond.  It represents a fixed dollar amount which is paid periodically as long

Calculate the amplitude of the dc component, Calculate the amplitude of the...

Calculate the amplitude of the DC component: A periodic voltage consists of sinusoidal pulses having an amplitude of 150 V (SEE DIAGRAM BELOW). Use Fourier Series Expansion to

Explain the mechanism that restores the balance of payments, Explain the me...

Explain the mechanism which restores the balance of payments equilibrium when it is disturbed under the gold standard. Answer:  The adjustment mechanism within the gold standar

Objectives of financial services authority, Objectives of financial service...

Objectives of financial services authority FSMA provides four statutory objectives to FSA. They are: Market Confidence: Maintaining confidence in the financial system;

Types of companies likely to have high operating leverage, Give two example...

Give two examples of types of companies likely to have high operating leverage.Find examples other than those cited in the chapter. Long distance electricity generating compani

What number of seats generates that maximum revenue, Q. In planning a resta...

Q. In planning a restaurant, it is estimated that a revenue of $6 per seat will be realized if the number of seats is at most 50. On the other hand, the revenue on each seat will d

Explain and compare the costs of hedging, Explain and compare the costs of ...

Explain and compare the costs of hedging via the forward contract and the options contract. Answer: There is no up-front cost of hedging through forward contracts. Though, in t

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd