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

For a firm using the basic EOQ model with no discount, the annual ordering cost at the EOQ is Rs 18,000. What is the total annual relevant cost (ordering plus carrying), ignoring purchase cost?

The total annual relevant cost is Rs 36,000. At the EOQ, the ordering cost curve and the carrying cost curve intersect, so the two costs are equal. With ordering cost at Rs 18,000, carrying cost is also Rs 18,000, and the two together total Rs 36,000.

  1. ARs 36,000Correct
  2. BRs 18,000
  3. CRs 9,000
  4. DRs 72,000

Explanation

At the EOQ, the lowest point of the total-cost curve, annual ordering cost equals annual carrying cost. Carrying cost is therefore also Rs 18,000, so the total relevant cost is 18,000 + 18,000 = Rs 36,000. Rs 18,000 counts only one of the two components.

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