CA Intermediate · Financial Management and Strategic Management · Management of Inventory
Gupta Traders needs 14,400 units a year. Ordering cost is Rs 100 per order and carrying cost is Rs 2 per unit per year. What is the total annual ordering plus carrying cost at EOQ?
Total cost at EOQ is Rs 2,400. EOQ is 1,200 units, giving 12 orders costing Rs 1,200, and average stock of 600 units costing Rs 1,200 to carry. Rs 1,200 is wrong because it counts only one of the two equal components.
- ARs 1,200
- BRs 2,400Correct
- CRs 2,880
- DRs 1,440
Explanation
EOQ = sqrt(2 x 14,400 x 100 / 2) = sqrt(1,440,000) = about 1,200. Orders = 14,400/1,200 = 12, ordering cost = 12 x 100 = Rs 1,200. Carrying cost = 1,200/2 x 2 = Rs 1,200. Total = Rs 2,400. At EOQ the two costs are equal, so Rs 1,200 alone is only one half.
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