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CMA Final · Strategic Cost Management · Just in Time (JIT)

Under JIT, Mehta Auto Parts reduces its setup time and thereby batch size. Annual demand is 14,400 units and setup cost per batch is Rs 400 at present. Carrying cost is Rs 8 per unit per year. Using the EOQ formula, the current economic batch size is 1,200 units. If setup cost is cut to Rs 25 per batch, what is the new EOQ?

The new EOQ is 300 units. Using sqrt(2 x 14,400 x 25 / 8) gives the root of 90,000, which is 300. Setup cost fell sixteen times, but EOQ varies with the square root, so the batch falls only to one quarter of 1,200.

  1. A300 unitsCorrect
  2. B600 units
  3. C75 units
  4. D150 units

Explanation

EOQ = sqrt(2DS/H). Check the present figure: 2x14,400x400/8 = 1,440,000, whose root is 1,200. New: 2x14,400x25/8 = 90,000, so EOQ = 300 units. A 16-fold fall in setup cost cuts the batch to one fourth, not one sixteenth.

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