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

Mehta Traders buys 14,400 units a year. Ordering cost is Rs 50 per order and carrying cost is Rs 4 per unit per year. What is the total of annual ordering and carrying cost at EOQ?

At EOQ of 600 units, there are 24 orders costing Rs 1,200 and average stock of 300 units carrying Rs 1,200. The total relevant cost is Rs 2,400, because ordering and carrying costs are equal at EOQ.

  1. ARs 2,400Correct
  2. BRs 1,200
  3. CRs 4,800
  4. DRs 3,600

Explanation

EOQ = sqrt(2 x 14,400 x 50 / 4) = sqrt(360,000) = 600 units. Orders = 14,400/600 = 24; ordering cost = 24 x 50 = Rs 1,200. Carrying cost = (600/2) x 4 = Rs 1,200. Total = Rs 2,400. Rs 1,200 counts only one of the two components, which is the key mistake.

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