CA Intermediate · Cost and Management Accounting · Material Cost
Which of the following is the correct formula for the Economic Order Quantity (EOQ) under the basic model, where A = annual consumption in units, O = ordering cost per order and C = carrying cost per unit per annum?
The basic EOQ is the square root of (2 × annual consumption × ordering cost per order) divided by carrying cost per unit per annum. It arises where total ordering cost equals total carrying cost, which minimises the combined cost of ordering and holding inventory.
- A√(2AO / C)Correct
- B√(AO / 2C)
- C√(2AC / O)
- D2√(AO / C)
Explanation
The basic EOQ model balances ordering cost (A/Q × O) with carrying cost (Q/2 × C). Equating them gives Q² = 2AO/C, so EOQ = √(2AO/C). The other forms interchange the variables or misplace the factor 2.
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