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

Kaveri Industries needs 14,400 units a year. Ordering cost is Rs 450 per order and carrying cost is Rs 16 per unit per year. What is the EOQ?

EOQ is the square root of (2 x 14,400 x 450 / 16), which is the square root of 810,000, giving 900 units. At this quantity annual ordering cost and annual carrying cost are both Rs 7,200, confirming the minimum total cost point.

  1. A900 units
  2. B1,080 unitsCorrect
  3. C1,200 units
  4. D1,800 units

Explanation

EOQ = sqrt(2 x 14,400 x 450 / 16) = sqrt(12,960,000 / 16) = sqrt(810,000) = 900. Check: orders = 16; ordering cost 7,200; carrying cost 450 x 16 = 7,200, which are equal. Hence 900, which is option 1 in value, not 1,080.

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