Business Cambridge Essay

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22 Inventory management Activity 22.1 (page 423): Stock management at Sportswize Equipment plc 1 Explain why, according to Jack, this business needs to hold stocks of raw materials and components. [6] Jack argues that the business needs to hold stocks of raw materials and components to ensure that production of sports equipment is never held up by a lack of relevant stock. This approach will ensure that machinery is never idle due to a stock-out. Thus, if a sudden increase in production of tennis rackets is required, then there will be metal frames in stock to allow this to occur. This will make it easier for Sportswize to meet customer orders quickly. 2 Explain the two other types of stock held by Sportswize. [4] • • 3 Finished goods − Sportswize holds stocks of footballs, football shirts and boots and other sports equipment ready to be sold to customers. Work-in-progress − semi-finished goods that are still undergoing production processes. Using your knowledge of batch-production methods, explain why stocks of certain goods are likely to be high at particular times. [6] Batch production involves the production of a group of identical items all at the same time. The group moves from one production process to another until all stages of production are complete. The entire group completes one stage of the process before any items move on to the next stage. As a consequence, there is a high level of work-in-progress as the production process requires each item in the batch to be stored, waiting for the other items in the batch to complete that process. 4 Assume current interest rates are at 10% per year and capital not used for holding stocks would be left in the bank. Calculate the opportunity cost of increasing stocks from $3 million to $7 million in one year. Explain your result. [5] Opportunity cost is the

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