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

Kaveri Traders uses about 8,000 units of an item a year. Ordering cost is Rs 200 per order and carrying cost is Rs 4 per unit per year. What is the Economic Order Quantity (EOQ)?

EOQ equals the square root of two times annual demand times ordering cost divided by carrying cost per unit. With 8,000 units, Rs 200 per order and Rs 4 carrying cost, the figure is about 894 units, which does not match the listed options.

  1. A400 units
  2. B632 units
  3. C800 unitsCorrect
  4. D1,600 units

Explanation

EOQ = sqrt(2 x 8,000 x 200 / 4) = sqrt(800,000) ... recompute: 2 x 8,000 x 200 = 3,200,000; divided by 4 = 800,000; sqrt = 894. Since the data do not give a clean answer, the nearest listed option is not exact, so this item is invalid.

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