Q.There are two Statements, Assertion (A) and Reason (R). Assertion (A) : Larger the lead time, larger is the quantity of material required to be stored and larger shall be the amount of working capital required. Reason (R) : If the raw material do not have a record of un-interrupted availability, higher stock levels may be required. Choose the correct alternative from the alternatives given below : (A) Assertion (A) is false and Reason (R) is true. (B) Both Assertion (A) and Reason (R) are false. (C) Assertion (A) is true and Reason (R) is false. (D) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
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Start your 14-day free trial to unlock the full solution →Both statements are true: longer lead times increase working capital needs, and unreliable raw material availability necessitates higher stock levels. The latter can explain the former.
Every business needs funds to manage its day-to-day operations. This is known as working capital. It's the capital required to finance current assets like inventory, debtors, and cash. The amount of working capital a business needs is influenced by various factors, including the nature of its business, scale of operations, credit policy, and, critically, its inventory management practices. Efficient management of inventory directly impacts the working capital requirement, as holding too much stock ties up valuable funds.
Let's examine Assertion (A): "Larger the lead time, larger is the quantity of material required to be stored and larger shall be the amount of working capital required."
Lead time refers to the duration between placing an order for raw materials or goods and their actual receipt. If this period is longer, a business must hold a greater quantity of materials in stock to ensure continuous production or sales during this waiting period. This is because the business needs to cover its consumption for a longer stretch of time before the new supply arrives. Holding a larger quantity of materials in inventory means more funds are blocked in current assets, directly increasing the working capital requirement. Therefore, Assertion (A) is a true statement.
Now, consider Reason (R): "If the raw material do not have a record of un-interrupted availability, higher stock levels may be required."
Uninterrupted availability implies that raw materials can be sourced and delivered consistently and reliably without delays or shortages. If a particular raw material lacks this consistent availability, meaning its supply is erratic, uncertain, or prone to disruptions, a business faces a higher risk of production halts or missed sales opportunities. To mitigate this risk, businesses often choose to maintain higher stock levels, known as safety stock or buffer stock. This extra inventory acts as a cushion against unexpected supply chain issues, ensuring that operations can continue even if there are delays or shortages in the incoming supply. Maintaining higher stock levels, in turn, increases the amount of capital tied up in inventory, thus increasing the working capital requirement. Therefore, Reason (R) is also a true statement.
Both lead time and raw material availability are critical factors in inventory management. They directly influence the level of inventory a business needs to hold, which in turn impacts its working capital.
Finally, let's assess if Reason (R) is the correct explanation for Assertion (A). …
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