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

Bharat Plastics uses 14,400 units a year. Ordering cost is Rs 50 per order and carrying cost is Rs 4 per unit per year. Purchase price is Rs 20 per unit. Using EOQ, what is the total of annual ordering cost and carrying cost?

EOQ is 600 units. Annual ordering cost is 24 orders times Rs 50, which is Rs 1,200, and carrying cost is average stock 300 times Rs 4, also Rs 1,200. The total is Rs 2,400, with purchase cost excluded.

  1. ARs 1,200
  2. BRs 2,400Correct
  3. CRs 3,600
  4. DRs 1,800

Explanation

EOQ = sqrt(2 x 14,400 x 50 / 4) = sqrt(360,000) = 600 units. Orders = 14,400/600 = 24; ordering cost = 24 x 50 = Rs 1,200. Carrying cost = 600/2 x 4 = Rs 1,200. Total = Rs 2,400. Purchase cost is excluded as it is not relevant to the EOQ cost.

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