CA Intermediate · Cost and Management Accounting · Unit & Batch Costing
Kapoor Components makes a part in batches. Each batch has a set-up cost of ₹3,000, and the carrying cost is ₹4 per unit per year. Annual demand is 24,000 units. What is the economic batch quantity (EBQ), ignoring production rate considerations?
The economic batch quantity is 6,000 units. Using EBQ = square root of (2 × annual demand × set-up cost ÷ carrying cost per unit), that is the square root of 2 × 24,000 × 3,000 ÷ 4, which equals the square root of 36,000,000, i.e. 6,000.
- A6,000 unitsCorrect
- B3,000 units
- C1,500 units
- D12,000 units
Explanation
EBQ = √(2DS/C) = √(2 × 24,000 × 3,000 / 4) = √(3,60,00,000) = 6,000 units. Check: 6,000² = 3,60,00,000. The 3,000 option would result from using wrong inputs such as halving the answer.
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