CA Intermediate · Financial Management and Strategic Management · Management of Inventory
Ravi Pharma Ltd buys a drug ingredient costing Rs 40 per unit. Annual demand is 7,200 units, ordering cost is Rs 180 per order and carrying cost is 18% of the purchase price per unit per year. What is the EOQ, and how many orders will be placed per year at EOQ?
Carrying cost is 18% of Rs 40, which is Rs 7.20 per unit. EOQ is the square root of 2 x 7,200 x 180 / 7.20, which is 600 units. Annual demand of 7,200 divided by 600 gives 12 orders a year.
- A600 units; 12 ordersCorrect
- B360 units; 20 orders
- C600 units; 6 orders
- D424 units; 17 orders
Explanation
Carrying cost per unit = 18% x 40 = Rs 7.20. EOQ = sqrt(2 x 7,200 x 180 / 7.2) = sqrt(360,000) = 600 units. Orders = 7,200/600 = 12. Using Rs 18 as carrying cost would give 380 approx, which is wrong.
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