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

Kapoor Traders uses 10,000 units a year. Ordering cost is Rs 50 per order and carrying cost is Rs 1 per unit per year. What is the EOQ?

EOQ is 1,000 units. It is the square root of twice the annual usage of 10,000 units times the Rs 50 ordering cost, divided by the Rs 1 carrying cost, which is the square root of 1,000,000. At this size ordering and carrying costs are equal.

  1. A500 units
  2. B1,000 unitsCorrect
  3. C2,000 units
  4. D5,000 units

Explanation

EOQ = sqrt(2 x 10,000 x 50 / 1) = sqrt(1,000,000) = 1,000 units. Check: orders = 10 per year, ordering cost Rs 500; average stock 500 units, carrying cost Rs 500; the two costs are equal, confirming the minimum. 500 units wrongly omits the factor 2 under the root in a different way (sqrt of 250,000).

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