Annual usage is 6000 units @ Rs 20 per unit Cost of placing an order is Rs 60 and annual carrying cost of one unit is 10% of inventory value EOQ = __________.
A. 600 units
B. 750 units
C. 1200 units
D. 1250 units
Answer: Option A
Solution (By Examveda Team)
What is EOQ?Imagine you run a shop. You need to order goods for your customers. If you order too much at once, you have to pay a lot to store them (this is called carrying cost). If you order too little, you have to order very often, and each time you place an order, it costs money (this is called ordering cost).
EOQ helps you find the 'just right' quantity to order each time to keep your total costs (ordering + carrying) as low as possible. It's like finding the perfect balance to save money!
The Formula for EOQ:
The formula to calculate EOQ is:
EOQ = Square Root of [(2 * D * O) / C]
Let's break down what each letter means:
* D = Annual Demand (or Usage) in units. This is how many units you need in a whole year.
* O = Ordering Cost per Order. This is the cost you incur every single time you place an order (e.g., administrative costs, paperwork, delivery arrangement costs).
* C = Annual Carrying Cost per Unit. This is the cost of holding one unit in your storage for a whole year (e.g., storage rent, insurance, costs due to damage, or the money tied up in inventory).
Let's find these values from our question:
1. Annual Usage (D): The question states "Annual usage is 6000 units".
So, D = 6000 units.
2. Ordering Cost per Order (O): The question states "Cost of placing an order is Rs 60".
So, O = Rs 60.
3. Annual Carrying Cost per Unit (C): This one needs a small calculation.
The question says "annual carrying cost of one unit is 10% of inventory value".
The inventory value (cost) per unit is Rs 20.
So, to find C, we calculate 10% of Rs 20:
C = 10% of Rs 20
C = 0.10 * 20 = Rs 2 per unit.
Now, let's put these values into the EOQ formula:
EOQ = Square Root of [(2 * D * O) / C]
EOQ = Square Root of [(2 * 6000 * 60) / 2]
Let's calculate step-by-step:
First, calculate the top part (numerator):
2 * 6000 * 60 = 12000 * 60 = 720,000
Next, divide by the bottom part (denominator):
720,000 / 2 = 360,000
Finally, find the square root of 360,000:
EOQ = Square Root of 360,000
EOQ = 600 units
So, the Economic Order Quantity (EOQ) is 600 units. This means ordering 600 units each time will be the most cost-effective way to manage inventory for this company.
Looking at the options:
Option A: 600 units
Option B: 750 units
Option C: 1200 units
Option D: 1250 units
Our calculated answer matches Option A.
Annual Demand ((D)) = (6000 ext{ units})Unit Price ((P)) = ( ext{Rs } 20)Ordering Cost per Order ((S)) = ( ext{Rs } 60)Carrying Cost Percentage = (10%)2. Calculate Annual Holding CostThe annual carrying (holding) cost per unit ((H)) is determined as a percentage of the inventory value (unit cost):(H=10% imes ext{Rs }20)(H=0.10 imes 20= ext{Rs }2 ext{ per unit per year})3. Apply the EOQ FormulaThe standard Economic Order Quantity formula is:( ext{EOQ}=sqrt{ rac{2 imes D imes S}{H}})Substitute the known values into the equation:( ext{EOQ}=sqrt{ rac{2 imes 6000 imes 60}{2}})( ext{EOQ}=sqrt{ rac{720,000}{2}})
Annual Usage(A): 6000
Ordering Cost(O): 60
Carrying Cost(C): 20*10%= 2
EOQ = √(2*A*O)/C
= √((2*6000*60)/2)
= 600
Correct Answer: Option (A)
Explain the scope of account
The following data have been extracted from the book of sunshine industries ltd.for the year
According to cost accounting there is a proper formula to calculate:
EOQ =Under root of ( 2*Annual consumption*Ordering cost)/(Unit cost*Carrying cost)
so put values in formula like: under root of (2*6000*60)/(10*20) =720000/200 = 3600
so after removing square root from 3600 the answer is 600.
EOQ = Root OF (2×6000×60/)20×10% = 600 Units