CA Intermediate · Cost and Management Accounting · Unit & Batch Costing
Mehta Auto Components manufactures a part in batches. Annual demand is 24,000 units. Setup cost per batch is ₹1,500 and carrying cost is ₹4 per unit per year. What is the economic batch quantity?
The economic batch quantity is about 4,243 units. It is calculated as the square root of (2 × annual demand × setup cost per batch ÷ carrying cost per unit), which is the square root of 18,000,000, or roughly 4,243 units.
- A4,243 units (approximately)Correct
- B3,000 units
- C6,000 units
- D1,500 units
Explanation
EBQ = sqrt(2 × 24,000 × 1,500 / 4) = sqrt(18,000,000) = 4,242.6, about 4,243 units. Using 2 × setup cost without the square root, or forgetting the factor 2, gives other values such as 3,000 or 6,000 that do not satisfy the formula.
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