A firm purchases 4,000 units of a particular item per annum at ₹40 per unit. Ordering cost is ₹100 per order and inventory carrying cost is 12.5%. Required: (a) Determine optimal order quantity. (b) If a 3% discount is o
CS Professional · Financial, Treasury and Forex Management · PYQS · June 2019
A firm purchases 4,000 units of a particular item per annum at ₹40 per unit. Ordering cost is ₹100 per order and inventory carrying cost is 12.5%. Required: (a) Determine optimal order quantity. (b) If a 3% discount is offered by the supplier for purchase in lot of 1,000 or more, should the firm accept the offer?
Answer & Explanation:
(a) Optimal Order Quantity (EOQ) EOQ = √(2AO/C) A = Annual Usage = 4000 units O = Ordering Cost per order = ₹100 C = Carrying Cost = ₹40 × 12.5% = ₹5 EOQ = √(2 × 4,000 × 100) / 5 = 400 units (b) Calculation of total cost for 400 units (Case 1) and 1000 units (Case 2) Ordered Quantity Purchase Price Ordering Cost Carrying Cost Total Cost 400 units (Case 1) 4,000 × ₹40 = ₹1,60,000 (4000/400) × ₹100 = ₹1,000 (400/2) × ₹5 = ₹1,000 ₹1,62,000 1,000 units (Case 2) 4,000 x ₹38.8 (after 3% discount) = ₹1,55,200 (4000/1000) × ₹100 = ₹400 Carrying cost per unit = 38.8 × 0.125 = 4.85 Total carrying cost = (1000/2) x 4.85 = ₹2,425 ₹1,58,025 Since the total cost in case 2 is less than case 1 (existing situation), therefore, firm should accept the offer.
Topics: Inventory Management
Related Questions in this Topic
- The following information is available for a component in use at TQR Ltd. : Normal usage 150 units per month Maximum usa...
- A company is considering selective inventory control using the following data: Item No. Units Unit Cost (₹) 1...
- Product-Y is sold for ₹20 per unit. The demand for the product is at a constant rate of 2,000 units per month. The cost ...
- The following annual figures relate to M Ltd. ₹ Sales (with two months' credit) 36,00,000 Materials consum...
- PQ established the following spread on the AB Corporation's stock: Purchased one 3-month call option with a premium of ...