Romfen Ltd., is involved in the manufacturing of ancillary parts required by automobile manufacturer. One of the main customer of Romfen Ltd., is Patru Ltd. As per the agreement between them, Romfen Ltd. has to supply 4,

CS Professional · Financial, Treasury and Forex Management · PYQS · December 2019
Romfen Ltd., is involved in the manufacturing of ancillary parts required by automobile manufacturer. One of the main customer of Romfen Ltd., is Patru Ltd. As per the agreement between them, Romfen Ltd. has to supply 4,000 units of product named as Honky per month to Patru Ltd., regularly and without any interruptions. To produce the Honky for each unit, one unit of the component Jivu is needed costing ₹20 per unit. The Procurement department's expenses involved in the administering of the one order works out to ₹120. The company's cost of capital is 10% per annum. You are required to calculate the following: (i) Economic Order Quantity

Answer & Explanation:

Working Notes: Monthly Requirement = 4,000 units Annual Requirement (A) = 4,000 units x 12 = 48,000 units Cost per unit of component Jivu = ₹20 Ordering Cost per order (O) = ₹120 Carrying Cost (C) = 10% of cost per unit = 10% of ₹20 = ₹2 per unit (i) Economic Order Quantity (EOQ) EOQ = √[(2 x Annual Requirement x Ordering Cost) / Carrying Cost per unit] EOQ = √[(2 x 48,000 x ₹120) / ₹2] EOQ = √[11,520,000 / 2] EOQ = √[5,760,000] EOQ = 2,400 units

Topics: Working Capital Management

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