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CA Intermediate · Financial Management and Strategic Management · Management of Inventory

Annual demand for a component at Kaveri Engineering is 20,000 units. Ordering cost is Rs 200 per order and carrying cost is Rs 4 per unit per year. What is the Economic Order Quantity?

EOQ equals the square root of two times annual demand times ordering cost divided by carrying cost per unit. Here that is the square root of 2,000,000, which is about 1,414 units. Using 2,000 would result from forgetting the square root step.

  1. A1,000 units
  2. B2,000 unitsCorrect
  3. C1,414 units
  4. D4,000 units

Explanation

EOQ = sqrt(2 x 20,000 x 200 / 4) = sqrt(2,000,000) = 1,414? Check: 2 x 20,000 x 200 = 8,000,000; divided by 4 = 2,000,000; square root = 1,414. So the correct value is 1,414 units, not 2,000. Therefore option 3 is correct on recalculation.

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