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: (ii) Total inventory holding cost comprises cost of ordering and cost of carrying.

Answer & Explanation:

(ii) Total inventory holding cost (Ordering Cost + Carrying Cost) Number of orders per year = Annual Requirement / EOQ = 48,000 / 2,400 = 20 orders Total Ordering Cost = Number of orders x Ordering Cost per order = 20 x ₹120 = ₹2,400 Average Inventory = EOQ / 2 = 2,400 / 2 = 1,200 units Total Carrying Cost = Average Inventory x Carrying Cost per unit = 1,200 x ₹2 = ₹2,400 Total Inventory Holding Cost = Total Ordering Cost + Total Carrying Cost = ₹2,400 + ₹2,400 = ₹4,800

Topics: Working Capital Management

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