CA Intermediate · Financial Management and Strategic Management · Management of Inventory
Sundaram Auto Parts uses 14,400 units of a component a year. Ordering cost is Rs 250 per order and carrying cost is Rs 20 per unit per year. Ignoring purchase price, what is the total annual ordering and carrying cost if it orders at the Economic Order Quantity?
The total is Rs 12,000. EOQ is 600 units, giving 24 orders at Rs 250, which is Rs 6,000, and average stock of 300 units at Rs 20, which is another Rs 6,000. At EOQ the two costs are equal.
- ARs 6,000
- BRs 12,000Correct
- CRs 24,000
- DRs 14,400
Explanation
EOQ = sqrt(2 x 14,400 x 250 / 20) = sqrt(360,000) = 600 units. Number of orders = 14,400/600 = 24, so ordering cost = 24 x 250 = Rs 6,000. Carrying cost = (600/2) x 20 = Rs 6,000. Total = Rs 12,000. Rs 6,000 counts only one component.
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