Use of safety stock by a firm would _______________.

Increase inventory cost

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Decrease inventory cost

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No effect on cost

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None of the above

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Solution

The correct option is A Increase inventory cost
Safety stock is an additional quantity of stock which a firm carries to avoid a stock out situation. This is also called as buffer stock. This stock may help the organization to cover up the additional sales generated against the estimates or in case suppliers are not able to provide the material due to some unforeseen circumstances.
This is an additional inventory of stock and for such additional stock carrying cost of storing such stock will have to be incurred.

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