CPIM Practice Exam

What does a high carrying cost indicate for an organization?

1. Efficient inventory management

2. Excessive inventory levels

3. Low demand for products

4. Effective sales forecasting

The correct answer is: Excessive inventory levels

A high carrying cost typically indicates excessive inventory levels within an organization. Carrying costs encompass all the expenses associated with holding inventory, including storage, insurance, depreciation, and opportunity costs of capital tied up in inventory. When these costs are high, it suggests that the organization is maintaining more inventory than necessary, which can lead to wastage and increased storage costs. In contrast, efficient inventory management would generally lead to lower carrying costs, as the organization would be effectively balancing supply and demand. Low demand for products typically results in excess inventory but is not directly indicated by carrying costs alone; it is more related to sales performance. Effective sales forecasting would help to reduce carrying costs by ensuring that inventory levels are aligned with expected demand, thereby minimizing excess stock. Therefore, excessive inventory levels are the most significant indicator of high carrying costs.