CMA Intermediate · Financial Management and Business Data Analytics · Inventory Management
Sundaram Auto Parts uses 14,400 units of a component a year. Each order costs Rs 100 to place, and carrying one unit for a year costs Rs 8. There is no quantity discount. What is the Economic Order Quantity?
The EOQ is 600 units. It is the square root of 2 times annual demand times ordering cost divided by carrying cost per unit: sqrt(2 x 14,400 x 100 / 8) = 600. At this size, annual ordering cost equals annual carrying cost, each Rs 2,400.
- A600 unitsCorrect
- B424 units
- C300 units
- D1,200 units
Explanation
EOQ = sqrt(2 x 14,400 x 100 / 8) = sqrt(360,000) = 600 units. Check: 24 orders at Rs 100 = Rs 2,400 and average stock 300 x Rs 8 = Rs 2,400, so the two costs are equal. 424 comes from omitting the 2 in the formula.
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