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CMA Intermediate · Financial Management and Business Data Analytics · Inventory Management

Bharat Textiles needs 12,000 units of yarn a year. Ordering cost is Rs 300 per order and carrying cost is 20% of purchase price per unit per year. The supplier charges Rs 50 per unit for orders below 1,000 units and Rs 48 per unit for orders of 1,000 units or more. Which order quantity minimises total annual cost, and what is that cost (purchase + ordering + carrying)?

Order 1,000 units at Rs 48, giving a total annual cost of Rs 5,84,400. The EOQ at Rs 50 is about 849 units with total cost of about Rs 6,08,485. The discount saving of Rs 24,000 on purchases far exceeds the small rise in ordering and carrying costs.

  1. A1,000 units; Rs 5,84,400Correct
  2. B849 units; Rs 6,08,485
  3. C1,000 units; Rs 5,80,800
  4. D849 units; Rs 6,00,000

Explanation

At Rs 50, EOQ = sqrt(2 x 12,000 x 300 / 10) = 848.5, which is feasible, and total cost = 6,00,000 + 4,243 + 4,243 = about Rs 6,08,485. At 1,000 units and Rs 48: purchase 5,76,000 + ordering 12 x 300 = 3,600 + carrying 500 x 9.6 = 4,800, giving Rs 5,84,400. The Rs 5,80,800 option leaves out the ordering cost.

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