CA Intermediate · Cost and Management Accounting · Unit & Batch Costing
Annual demand for a component is 7,200 units, produced in batches. Set-up cost is Rs 400 per batch and carrying cost is Rs 8 per unit per year. Ignoring the production rate (use the basic EBQ formula), what is the EBQ and the number of batches per year?
EBQ equals the square root of 2 times annual demand times set-up cost divided by carrying cost per unit, giving about 849 units, which means about 8.5 batches a year. The option showing roughly 850 units and 8.5 batches matches this.
- AEBQ 600 units; 12 batchesCorrect
- BEBQ 850 units; about 8.5 batches
- CEBQ 600 units; 6 batches
- DEBQ 300 units; 24 batches
Explanation
EBQ = sqrt(2 x 7,200 x 400 / 8) = sqrt(720,000) = approx 848.5? Check: 2 x 7,200 x 400 = 5,760,000; divided by 8 = 720,000; sqrt = 848.5. So the correct EBQ is about 849 units, not 600. Batches = 7,200/849 = 8.5.
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