The reason for such a suggest stems from the trade off that exists in inventory that all business organizations that keep stock face. When holding stock there are two main risks that face the opposite direction. On one side there is the risk that the company purchases a lot of stock that will not be used and will eventually turn obsolete, as the case at hand. Keeping high volume of stock holds other disadvantages apart obsolescence. For example, the greater the stock volume the higher the resources entrusted for such asset.
Indeed organizations that keep high volume of stock incur greater holding costs, such as wages of employees working in stores, insurance and other related overheads. In addition, by keeping a high volume of stock a substantial part of the firms working capital will be tied up in stock. We ought to keep in mind that cash is the lifeblood of the organization and an appropriate cash buffer balance should be kept to cater for other working capital commitments like payments to suppliers apart from inventory. The other extreme side, which encompasses keeping low volume of stock, is also dangerous.
If the company ends up without inventory, there is the risk that the firm will not be capable to meet the demands of the customers. As a result, orders will be lost and the organization might lose a part of its present market share. In this respect an appropriate balance between these two side should be kept and this is the reason why the president should be careful in how favoring Beverly.
Drury C. (1996). Management and Cost Accounting. Fourth Edition. New York: International Thomson Business Press.