CMA Intermediate · Financial Management and Business Data Analytics · Inventory Management
A retailer's analyst plots monthly stock-out incidents against monthly safety-stock rupee value across 24 months and finds a correlation of -0.8. Which interpretation is consistent with this data and inventory cost theory?
A correlation of -0.8 shows a strong negative relationship, so higher safety stock tends to go with fewer stock-outs, at the price of higher carrying cost. Correlation is not a per-rupee effect and does not prove causation.
- AHigher safety stock tends to accompany fewer stock-outs, but raises carrying costCorrect
- BHigher safety stock causes more stock-outs and lowers carrying cost
- CSafety stock and stock-outs are unrelated
- DEach rupee of safety stock removes exactly 0.8 stock-outs
Explanation
A correlation of -0.8 indicates a strong negative association: more safety stock goes with fewer stock-outs. Holding more stock raises carrying cost, giving the trade-off. The coefficient is not a slope, so the last option is wrong.
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