CA Intermediate · Financial Management and Strategic Management · Management of Inventory
Annual demand for a component at Sundaram Engineering is 7,200 units. Ordering cost is Rs 250 per order and carrying cost is Rs 10 per unit per year. What is the Economic Order Quantity?
EOQ is 600 units. It equals the square root of 2 times annual demand times ordering cost divided by carrying cost per unit, that is the square root of 2 x 7,200 x 250 / 10, which is 360,000, giving 600 units.
- A300 units
- B424 units
- C600 unitsCorrect
- D850 units
Explanation
EOQ = sqrt(2 x 7,200 x 250 / 10) = sqrt(360,000) = 600 units. Check: orders = 12, ordering cost 3,000; carrying cost = 300 x 10 = 3,000, equal as required. 300 results from dividing by 2 after the root only; 424 results from omitting the factor 2 in the numerator; 850 results from omitting the division by 2 in the numerator error of using 2x2.
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