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

Sharma Tools Ltd uses 18,000 units of a component 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 twice annual usage times ordering cost divided by carrying cost per unit. With 18,000 units, Rs 200 and Rs 4 this gives about 1,342 units, which does not match any option exactly.

  1. A900 units
  2. B1,200 units
  3. C1,800 unitsCorrect
  4. D3,600 units

Explanation

EOQ = sqrt(2 x A x O / C) = sqrt(2 x 18,000 x 200 / 4) = sqrt(1,800,000) which is about 1,341 units. Since the options must match exactly, recompute: 2 x 18,000 x 200 = 7,200,000; divided by 4 = 1,800,000; sqrt is about 1,342, so no option fits. Correct choice using the intended data fails, so this item is unreliable.

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