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

Kaveri Pumps uses 18,000 units of a component a year. Ordering cost is ₹200 per order and carrying cost is ₹16 per unit per year. What is the total annual cost of ordering and carrying at the EOQ (ignore purchase cost)?

At EOQ the total of ordering and carrying cost equals the square root of 2 × annual demand × ordering cost × carrying cost per unit, which gives about ₹10,733 for this data.

  1. A₹14,400Correct
  2. B₹7,200
  3. C₹28,800
  4. D₹9,600

Explanation

EOQ = √(2×18,000×200/16) = √450,000 = 670.8 units (approx). Ordering cost = (18,000/670.8)×200 = ₹5,367 approx and carrying cost = (670.8/2)×16 = ₹5,367 approx, so the total is about ₹10,733. Check with formula: total = √(2×A×O×C) = √(2×18,000×200×16) = √115,200,000 = ₹10,733. None of the listed values matches, so recompute with the data chosen: the stated key is therefore inconsistent.

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