CMA Intermediate · Cost Accounting · Material Costs
Annual demand is 3,600 units, ordering cost is Rs 200 per order and carrying cost is Rs 4 per unit per year. What is the minimum total annual cost of ordering and carrying (excluding purchase cost)?
EOQ is 600 units. Ordering cost is 6 orders at Rs 200, which is Rs 1,200, and carrying cost is average stock 300 times Rs 4, which is Rs 1,200. The minimum total is therefore Rs 2,400.
- ARs 1,200
- BRs 2,400Correct
- CRs 3,600
- DRs 4,800
Explanation
EOQ = sqrt(2 x 3,600 x 200 / 4) = sqrt(360,000) = 600 units. Orders = 3,600/600 = 6, ordering cost = 6 x 200 = Rs 1,200. Carrying cost = 600/2 x 4 = Rs 1,200. Total = Rs 2,400. Rs 1,200 counts only one component.
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