Question

Which of the following statements is true about safety stock?

A) It depends on the required service level.
B) It depends only on the amount of demand.
C) It must always be carried.
D) All of the above are true.
E) None of the above is true.

Answer 1

The correct answer is option A) It depends on the required service level.

Step-by-step explanation:

Safety stock is an additional quantity of an item held in the inventory to reduce the risk that the item will be out of stock.

Safety stock acts as a buffer for the unpredictability of demand and supply. It is directly related to the service level, which is a measure of how well a company can meet its customer demand without experiencing stockouts.

Demand variability, lead time, and the service level are all factors that influence the appropriate level of safety stock. The other statements are not entirely true as safety stock may depend on several factors and does not need to be carried if the costs or other strategic reasons do not justify it.

A price floor set c. substantially above the equilibrium price or d. slightly above the equilibrium price does not shift the demand or supply curve, but instead creates a minimum price for which the product can be sold, potentially resulting in a surplus if set above the equilibrium price.