CMA Intermediate · Financial Management and Business Data Analytics · Inventory Management
A firm buys 9,000 units a year at Rs 200 per unit. Ordering cost is Rs 200 per order and carrying cost is 20% of price, giving an EOQ of 300 units. If the supplier cuts the price to Rs 50 with no other change, what is the new EOQ?
The new EOQ is 600 units. When carrying cost is a percentage of price, a price fall to one-fourth cuts carrying cost per unit from Rs 40 to Rs 10. EOQ is inversely proportional to the square root of carrying cost, so it doubles from 300 to 600.
- A600 unitsCorrect
- B1,200 units
- C150 units
- D300 units
Explanation
Carrying cost per unit falls from Rs 40 to Rs 10 (20% of Rs 50). New EOQ = sqrt(2 x 9,000 x 200 / 10) = sqrt(360,000) = 600 units. The price fell to one-fourth, so the EOQ doubles, since EOQ varies inversely with the square root of carrying cost. 1,200 wrongly treats the change as inversely proportional to the price.
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