A higher level of competitiveness may make it necessary for a firm to keep larger stocks of ______ to meet urgent orders from customers. This increases its working capital requirement.
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → finished goods
Option (1) raw materials — Incorrect. Larger stocks of raw materials are needed when materials are not available freely or arrive late. That comes under the factor availability of raw material. Raw materials still have to be made into goods, so they cannot meet an urgent order at once.
Option (2) finished goods — Correct. When competition is high, a customer who has to wait may go to a rival. So the firm keeps ready finished goods to supply urgent orders at once. Money stays locked up in this extra stock, so the working capital requirement goes up.
Option (3) work in progress — Incorrect. Work in progress means goods that are still being made. Half-made goods cannot be sent to a customer against an urgent order.
Option (4) raw materials and work in progress — Incorrect. Raw materials and work in progress are both still to be finished. Neither is ready for sale, so neither can meet an urgent order from a customer.
NCERT (2026-27 Edition): “11. Level of Competition: Higher level of competitiveness may necessitate larger stocks of finished goods to meet urgent orders from customers. This increases the working capital requirement. Competition may also force the firm to extend liberal credit terms discussed earlier.” “9. Availability of Raw Material: If the raw materials and other required materials are available freely and continuously, lower stock levels may suffice. If, however, raw materials do not have a record of un-interrupted availability, higher stock levels may be required. In addition, the time lag between the placement of order and the actual receipt of the materials (also called lead time) is also relevant. Larger the lead time, larger the quantity of material to be stored and larger shall be the amount of working capital required.” |