ACCA Applied Knowledge · Management Accounting · Accounting for material, labour and overheads
A company uses 18,000 units of a component each year. The cost of placing an order is $50 and the annual holding cost is $2.00 per unit. Demand is constant and there are no stock-outs. What is the economic order quantity (EOQ)?
The EOQ is about 949 units. It is found by taking the square root of twice the ordering cost times annual demand, divided by the annual holding cost per unit: root of (2 x 50 x 18,000 / 2) = root of 900,000.
- A600 units
- B949 units
- C1,342 unitsCorrect
- D1,897 units
Explanation
EOQ = square root of (2 x Co x D / Ch) = square root of (2 x 50 x 18,000 / 2) = square root of 900,000 = 949. Wait, check: 2 x 50 x 18,000 = 1,800,000; divided by 2 = 900,000; root = 948.7, so 949 units. The option 1,342 comes from omitting the 2 in the formula incorrectly, so the correct choice is 949.
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