CA Intermediate · Cost and Management Accounting · Material Cost
Sundaram Auto Ltd. uses 36,000 units of a component a year. Ordering cost is Rs 200 per order and carrying cost is Rs 8 per unit per year. Using the EOQ model, what is the total annual relevant cost (ordering plus carrying cost)?
The total relevant cost at EOQ equals the square root of 2 x annual demand x ordering cost x carrying cost, which is about Rs 10,733 for this data. None of the listed figures matches exactly.
- ARs 4,800Correct
- BRs 2,400
- CRs 9,600
- DRs 7,200
Explanation
EOQ = sqrt(2 x 36,000 x 200 / 8) = sqrt(1,800,000) = 1,342 approx. Check using the property that at EOQ ordering cost equals carrying cost: orders = 36,000/1,342 = 26.83; ordering cost = 26.83 x 200 = about 5,366, so total = 2 x 5,366 = about 10,733. Recomputing: 2 x 36,000 x 200 = 14,400,000; divided by 8 = 1,800,000; the square root is 1,341.6. Total cost = sqrt(2 x D x S x H) = sqrt(2 x 36,000 x 200 x 8) = sqrt(115,200,000) = about 10,733, which is not among the options, so the data do not reconcile.
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