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CA Intermediate · Financial Management and Strategic Management · Management of Inventory

Kapoor Industries buys 4,000 units yearly. Ordering cost is Rs 200 per order; carrying cost is 20% of purchase price. The supplier quotes Rs 50 per unit for orders below 800 units and Rs 48 per unit for orders of 800 or more. Which order size gives the lowest total annual cost (purchase + ordering + carrying)?

Ordering 800 units is cheapest. At 400 units total cost is Rs 204,000, at 800 units it is Rs 196,840, and at 4,000 units it is Rs 211,400. The Rs 2 discount saves Rs 8,000 on purchases, outweighing the higher carrying cost.

  1. A400 units, as it is the EOQ at Rs 50
  2. B800 units, to avail the discountCorrect
  3. CBoth cost the same
  4. D4,000 units, a single order

Explanation

EOQ at Rs 50: sqrt(2x4,000x200/10) = 400. Cost at 400: purchase 200,000 + ordering 10x200=2,000 + carrying 400/2x10=2,000 = Rs 204,000. At 800 and Rs 48 (carrying 9.6): purchase 192,000 + ordering 5x200=1,000 + carrying 400x9.6=3,840 = Rs 196,840. 4,000 units: 192,000+200+19,200 = 211,400. So 800 is lowest.

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