CMA Intermediate · Cost Accounting · Material Costs
Gupta Industries uses 14,400 units of a material a year. The ordering cost is ₹150 per order and the carrying cost is ₹3 per unit per year. What is the Economic Order Quantity?
EOQ is the square root of 2 times annual usage times ordering cost divided by carrying cost per unit. Here it is the square root of 2 × 14,400 × 150 / 3, which is 1,200 units. At this size ordering cost equals carrying cost.
- A600 units
- B1,200 unitsCorrect
- C1,440 units
- D2,400 units
Explanation
EOQ = √(2 × 14,400 × 150 / 3) = √1,440,000 = 1,200 units. Option A (600) results from forgetting the factor 2 and taking the wrong root. Check: 12 orders of 1,200 units each cost 12 × 150 = ₹1,800 in ordering, and average stock of 600 units costs ₹1,800 to carry, so the two costs are equal.
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