Question

Q1) Which of the following relationships hold true for safety stock?
A. the greater the risk of running out of stock, the smaller the safety of stock.
B. the larger the opportunity cost of the funds invested in inventory, the larger the safety stock.
C. the greater the uncertainty associated with forecasted demand, the smaller the safety stock.
D. the higher the profit margin per unit, the higher the safety stock necessary.

Answer 1

Answer 1 : D. The higher the profit margin per unit, the higher the safety stock necessary.

Note : For the safety stock, to maintain the production capacity without any interruption it is necessary to have higher safety stock especially when the profit margin is high per unit.