CA Intermediate · Cost and Management Accounting · Unit & Batch Costing
Kaveri Engineering uses batch costing. Set-up cost per batch is Rs 8,000 and carrying cost is Rs 4 per unit per year. Annual demand is 25,000 units, and the firm wants the batch quantity that minimises the sum of set-up and carrying costs, using the economic batch quantity formula sqrt(2DS/C). What is the EBQ?
The EBQ is 10,000 units. Applying sqrt(2DS/C) with annual demand 25,000, set-up cost Rs 8,000 and carrying cost Rs 4 per unit gives the square root of 100,000,000, which equals 10,000 units.
- A10,000 unitsCorrect
- B5,000 units
- C1,000 units
- D7,071 units
Explanation
EBQ = sqrt(2 x 25,000 x 8,000 / 4) = sqrt(100,000,000) = 10,000 units. Check: 5,000 would result from using demand of 25,000 with S of 8,000 and C of 16 by mistake; 7,071 comes from omitting the factor 2 incorrectly in a different way.
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