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CA Intermediate · Financial Management and Strategic Management · Management of Inventory

Tulsi Foods buys 7,200 units annually. Ordering cost is Rs 50 per order, carrying cost is 20% of purchase price. Price is Rs 10 per unit for orders below 600 units and Rs 9.50 per unit for orders of 600 units or more. Which order size minimises total cost?

Ordering 600 units is best because it qualifies for the Rs 9.50 price, giving total cost of about Rs 69,570 including purchase, ordering and carrying costs. Ordering 300 units at Rs 10 would cost about Rs 73,500, so the discount clearly outweighs the extra carrying cost.

  1. A300 units, as EOQ is lowest cost
  2. B600 units, as the discount outweighs extra carrying costCorrect
  3. CEither, as both give equal cost
  4. D1,200 units, as larger orders always cost less

Explanation

At Rs 10: EOQ = sqrt(2 x 7,200 x 50 / 2) = sqrt(360,000) = 600, which is not below 600, so the discounted price applies. At Rs 9.50: carrying cost per unit = 1.90, EOQ = sqrt(720,000/1.9) = about 616, so ordering about 616 is feasible and 600 is near-optimal. At 600 units: purchase 68,400 + ordering 12 x 50 = 600 + carrying 300 x 1.9 = 570 = 69,570. At 300 units at Rs 10 (not available as EOQ is 600) the cost would be higher at 72,000 + 1,200 + 300 = 73,500.

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