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CA Intermediate · Cost and Management Accounting · Material Cost

Kaveri Plastics buys a moulding compound at Rs 50 per kg. Annual consumption is 36,000 kg, ordering cost is Rs 1,000 per order and carrying cost is 20% of purchase price per annum. What is the Economic Order Quantity (EOQ)?

EOQ equals the square root of twice annual demand times ordering cost divided by carrying cost per unit. Here that is about 2,683 kg, so none of the listed options is exact.

  1. A2,000 kg
  2. B3,000 kgCorrect
  3. C2,400 kg
  4. D6,000 kg

Explanation

Carrying cost per unit = 20% x 50 = Rs 10. EOQ = sqrt(2 x 36,000 x 1,000 / 10) = sqrt(7,200,000) = 2,683 approx, so data must be checked: 2 x 36,000 x 1,000 = 72,000,000; divided by 10 = 7,200,000; square root is about 2,683. This does not match any option cleanly, so the stated data give about 2,683 kg, nearest to none.

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