CPIM Practice Exam

Capacity-related costs are generally associated with what aspect of inventory management?

1. Short-term workforce management

2. Increasing or decreasing production capacity

3. Order processing mechanisms

4. Logistics and transportation expenses

The correct answer is: Increasing or decreasing production capacity

Capacity-related costs are associated with increasing or decreasing production capacity because they directly affect how much product can be produced in a given timeframe. This includes investments in equipment, facilities, and technology that enhance a company's ability to produce goods. When capacity is increased to meet rising demand, costs may rise due to the need for additional machinery or labor, and when capacity is decreased due to falling demand, there may be costs related to downsizing or reallocating resources. This aspect of inventory management is critical because it helps ensure that the company can meet customer demand efficiently without incurring unnecessary holding costs associated with excess inventory. The decision to adjust production capacity impacts not only the ability to satisfy market needs but also the overall cost structure of the company, making it essential to balance capacity with demand to maximize profitability. Understanding these dynamics helps inventory managers make informed decisions about when and how to adjust production levels in response to market fluctuations.