Audit and Assurance Practice Exam

What does increased demand for a low-priced product generally indicate for inventory management?

1. Higher strategic risk

2. More effective turnover

3. Potential for excess inventory

4. Expansion limitations

The correct answer is: More effective turnover

Increased demand for a low-priced product typically indicates a more effective turnover for inventory management. When demand rises, it often leads to quicker sales of existing stock, which means that the company is able to move its inventory faster. This effective turnover minimizes holding costs and ensures that cash flow remains healthy, as products are not sitting in inventory for long periods. With a low-priced product experiencing increased demand, businesses focus on maintaining optimal inventory levels to meet consumer needs without overstocking. This strategy aligns inventory closely with sales patterns, further enhancing the efficiency of inventory management. In contrast, while potential for excess inventory might seem plausible if demand fluctuates unexpectedly, in a scenario of increased demand, robust inventory turnover is the primary focus. Similarly, higher strategic risk and expansion limitations may not directly correlate with the context of a low-priced product's increasing demand, as these factors deal more with overall business strategy and market positioning rather than the inherent efficiency of inventory processes under heightened demand conditions.