CA Intermediate · Cost and Management Accounting · Material Cost
A firm uses 7,200 units of a material a year. Ordering cost is ₹250 per order and carrying cost is ₹10 per unit per annum. What is the EOQ?
EOQ is the square root of 2 × annual demand × ordering cost divided by carrying cost per unit. Here that is the square root of 2 × 7,200 × 250 / 10, which equals 600 units. At this quantity ordering and carrying costs are both ₹3,000.
- A300 units
- B600 unitsCorrect
- C360 units
- D1,200 units
Explanation
EOQ = √(2 × 7,200 × 250 / 10) = √360,000 = 600 units. Check: orders = 12, ordering cost 3,000; carrying cost = 300 × 10 = 3,000, equal as required at EOQ. 300 units results from dropping the factor 2 in the formula... (√180,000 ≈ 424, not 300), so it is simply wrong.
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