Explain the costs and benefits to a business of a decision to hold low levels of inventory.

Mark scheme

Marking points from the official mark scheme (May/June 2016). The mark or mark type is shown in brackets.

1. Answers could include:
2. Costs such as:
3. Insufficient stock to meet demands - lost sales
4. Lack of raw materials leads to idle production resources
5. Unable to respond to exceptional/new orders quickly
6. If not buying large quantity of inventory, miss out on bulk buying discounts (JIT).
7. Benefits:
8. Opportunity cost of capital invested in inventory is reduced
9. Reduced storage costs
10. Reduced risk of wastage/obsolescence
11. Easier to organise and retrieve inventory.
12. Very much depends on the type of business activity involved and whether demand is normal or exceptional. It is a trade-off between benefits and risk of incurring costs.
13. Please accept and reward other relevant points.
14. [4-5] Effective explanation of costs and benefits of holding a low level of inventory.
15. [2-3] Limited explanation of costs and/or benefits of holding a low level of inventory.
16. [1] Understanding of inventory.