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

Meera Textiles buys 3,600 kg of dye annually. Ordering cost is ₹50 per order and carrying cost is ₹1 per kg per year. What is the EOQ?

EOQ is the square root of 2 × annual consumption × ordering cost per order divided by carrying cost per unit. Here that is √(2×3,600×50/1) = √360,000 = 600 kg, where ordering and carrying costs are equal at ₹300 each.

  1. A600 kgCorrect
  2. B300 kg
  3. C360 kg
  4. D1,200 kg

Explanation

EOQ = √(2AO/C) = √(2×3,600×50/1) = √360,000 = 600 kg. Check: orders = 6 per year, ordering cost ₹300; carrying cost = 300×1 = ₹300, so the costs are equal at EOQ. Option B (300) results from forgetting the factor 2 under the root ... actually √180,000 is about 424, so 300 is simply the average stock.

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