CA INTERMEDIATE: COSTING & FM · MATERIAL COST

Economic order quantity (EOQ)

EOQ = √(2AO ÷ C): A = annual demand (units), O = ordering cost per order, C = carrying cost per unit per year.

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Worked examples

Example 1 · level 1

Mehta Polymers uses 4,500 units of a component a year. Ordering cost is ₹50 per order and carrying cost is ₹5 per unit per year. Find the EOQ.

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2AO ÷ C = 2 × 4,500 × 50 ÷ 5 = 90,000.
EOQ = √90,000 = 300 units.

Answer: 300 units

Example 2 · level 2

Gupta Auto Parts uses 200 units of a component a year. Ordering cost is ₹500 per order and carrying cost is ₹5 per unit per year. Find the EOQ.

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2AO ÷ C = 2 × 200 × 500 ÷ 5 = 40,000.
EOQ = √40,000 = 200 units.

Answer: 200 units

Example 3 · level 3

Sharma Industries Ltd uses 450 units of a component a year. Ordering cost is ₹200 per order and carrying cost is 25% p.a. of the purchase price of ₹8 per unit. Find the EOQ.

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Carrying cost per unit C = 25% of ₹8 = ₹2.
2AO ÷ C = 2 × 450 × 200 ÷ 2 = 90,000.
EOQ = √90,000 = 300 units.

Answer: 300 units