CA Intermediate · Financial Management and Strategic Management · Management of Inventory
Sharma Traders uses 7,200 units of a component a year. Ordering cost is Rs 250 per order and carrying cost is Rs 10 per unit per year. Using the EOQ model, what is the total of annual ordering cost and carrying cost at the economic order quantity?
The total cost is Rs 6,000. EOQ is 600 units, giving 12 orders costing Rs 3,000 and average stock of 300 units costing Rs 3,000 to carry. At EOQ the two costs are equal, so the total is double either one.
- ARs 3,000
- BRs 6,000Correct
- CRs 1,500
- DRs 3,600
Explanation
EOQ = sqrt(2 x 7,200 x 250 / 10) = sqrt(360,000) = 600 units. Orders = 7,200/600 = 12, so ordering cost = 12 x 250 = Rs 3,000. Carrying cost = 600/2 x 10 = Rs 3,000. Total = Rs 6,000. Rs 3,000 counts only one component.
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