Kopla Ltd. manufactures a product X. To produce one unit of finished product, 4 kg of raw material is required. The sales department has estimated an annual demand of 5,00,000 units. Stock position at the beginning of th

CS Professional · Financial, Treasury and Forex Management · PYQS · December 2018
Kopla Ltd. manufactures a product X. To produce one unit of finished product, 4 kg of raw material is required. The sales department has estimated an annual demand of 5,00,000 units. Stock position at the beginning of the year is as below: Product X: 20,000 units Raw material: 40,000 kgs To place an order the company has to spent ₹ 1,500. The company is financing its working capital using a bank cash credit @ 12%. Product X is sold at ₹ 1,040 per unit, material is purchased at ₹ 150 per kgs. Compute: Economic Order Quantity

Answer & Explanation:

(a) Economic Order Quantity Annual production of product X = Annual demand - opening stock = 5,00,000 - 20,000 = 4,80,000 units Annual requirement of raw materials = (annual production * material required per unit) - opening stock of material = (4,80,000 * 4) - 40,000 = 19,20,000 - 40,000 = 18,80,000 kg EOQ = √(2AO / C) A = Annual usage = 18,80,000 kg O = Ordering cost per order = ₹ 1,500 C = Carrying cost = ₹ 150 * 0.12 = ₹ 18 EOQ = √(2 * 18,80,000 * 1500 / 18) EOQ = √(5,640,000,000 / 18) EOQ = √(313,333,333.33) EOQ = 17,701 kg (approx)

Topics: Working Capital Management

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