CA Intermediate · Cost and Management Accounting · Material Cost
Bharat Tools uses 20,000 units of a component a year, evenly spread. Ordering cost is Rs 90 per order and carrying cost is Rs 10 per unit per year. Using the basic EOQ model, what is the Economic Order Quantity?
EOQ is the square root of 2 x annual consumption x ordering cost divided by carrying cost per unit. With 20,000 units, Rs 90 per order and Rs 10 carrying cost, the root of 360,000 is 600 units.
- A300 units
- B600 unitsCorrect
- C900 units
- D1,200 units
Explanation
EOQ = sqrt(2 x 20,000 x 90 / 10) = sqrt(360,000) = 600 units. Check: 600 x 600 = 360,000. Choosing 300 would come from omitting the factor 2 incorrectly and halving the result.
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