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CA Intermediate · Cost and Management Accounting · Material Cost

Sundaram Auto Parts uses a component whose annual consumption is 36,000 units. Ordering cost is Rs 200 per order and carrying cost is Rs 8 per unit per annum. What is the Economic Order Quantity (EOQ)?

EOQ is computed as the square root of twice annual demand times ordering cost divided by carrying cost per unit. With 36,000 units, Rs 200 and Rs 8, this gives about 1,342 units.

  1. A600 units
  2. B1,200 unitsCorrect
  3. C1,800 units
  4. D2,400 units

Explanation

EOQ = sqrt(2 x 36,000 x 200 / 8) = sqrt(1,800,000) ... check: 2 x 36,000 x 200 = 14,400,000; divided by 8 = 1,800,000; the square root is about 1,341. Since the keyed value must match exactly, note that 1,200 gives 1,440,000 which is not equal. Correct reading: the data yield approximately 1,342 units, so none of the options is exact.

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