CMA Intermediate · Financial Management and Business Data Analytics · Inventory Management

Kaveri Electricals needs 8,000 units a year. Ordering cost is Rs 200 per order and carrying cost is 25% of unit price. The supplier's price list is: below 500 units, Rs 40; 500 to 1,999 units, Rs 38; 2,000 units or more, Rs 36. Which order quantity gives the lowest total annual cost (purchase + ordering + carrying), and what is that cost?

Order 2,000 units at Rs 36, for a total annual cost of Rs 2,97,800. The feasible EOQ at Rs 38 is about 580 units, costing about Rs 3,09,514. The Rs 16,000 purchase saving at the lowest price outweighs the higher carrying cost of the larger lot.

A2,000 units; Rs 2,97,800Correct
B580 units; Rs 3,09,514
C2,000 units; Rs 2,88,800
D500 units; Rs 3,09,575

Explanation

At Rs 36 the EOQ is sqrt(2 x 8,000 x 200 / 9) = 596, below 2,000, so it is infeasible and 2,000 is the candidate. At Rs 38 the EOQ is sqrt(3,200,000 / 9.5) = 580, which is feasible, and its cost is 3,04,000 + 2,757 + 2,757 = about Rs 3,09,514. At 2,000 units: 2,88,000 + 4 x 200 = 800 + 1,000 x 9 = 9,000, giving Rs 2,97,800. The Rs 2,88,800 option leaves out carrying cost.

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