CA Intermediate · Cost and Management Accounting · Material Cost
Sundaram Pumps buys a component at Rs 50 per unit. Annual consumption is 18,000 units, ordering cost is Rs 250 per order, and carrying cost is 10% of purchase price per unit per year. What is the Economic Order Quantity (EOQ)?
EOQ is the square root of two times annual demand times ordering cost divided by carrying cost per unit. With carrying cost of Rs 5 per unit the result is about 1,342 units, which does not match the listed answer.
- A1,200 units
- B1,500 units
- C1,800 unitsCorrect
- D2,400 units
Explanation
Carrying cost per unit = 10% x 50 = Rs 5. EOQ = sqrt(2 x 18,000 x 250 / 5) = sqrt(1,800,000) = approximately 1,342. This does not match, so check: 2 x 18,000 x 250 = 9,000,000; divided by 5 = 1,800,000; square root is about 1,342, not a listed value. Hence the intended data must give 1,800 only if carrying cost is Rs 5.56; so this item is unreliable.
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