Review Illustrations

Problem 3.1
Economic Batch Quantity and number of orders

Compute the Economic Batch Quantity and total number of batches during the year from the
following information:
Average number of units to be produced during a month-2,000 units
Set up cost per batch-Z60
Total cost of production per unit-5
Annual rate of interest-10% [C.u. B.com. (Hons.) 2006
Solution:
U =Annual consumption =
2,000 12 24,000 units
O = Set up cost per batch = T60

C Carrying Cost = 10% of 75 = T0-50

E.B.O2U0-2 24000760=/57,60,000 = 2,400units

C 0-50
Number of batches during the year
Annual consumption 24,000 units 10 batches
E.B.Q. 2,400 units
Problem 3.2
Finding out EOQ and variable cost
From the following particulars, compute the economic order quantity and total cost:
Annual Demand
5,000 units
Unit price 20
Order cost per order
716
Storage rate
2% per annum
Interest rate
12% per annum
Obsolescence rate
6% per annum
Solution:

Annual usage =
U =
5,000 units
Ordering cost per order =O = 16
Carrying cost of each
unit per annum C = Storage rate + Interest rate + Obsolescence rate] of unit cost
2% +12% + 6%] of T20
=
20% of T20 74 =

Economic Order Quantity

o= 2U.O-2x5000xl6-40,000 =200 units

Calculation of Ordering Costs

Number of orders to be placed =Annual Demand =5,000 units a4 s

EOQ 00 units

Ordering Cost =
25 x R16 = R400
Carrying Cost of Average Inventory

200x4 z400
So, Total cost = 7400 + 7400 = R800

Problem 3.3
Time lag between orders
available in respect of a material MMI' used in the production of goods of
ne following data are

M/s Bright Ltd. for the year 2001:

Cost of materials per unit 750
300 units
Weekly consumption T650
Ordering cost per order
2% per month (on cost)
Stock holding cost
Compute
(a) Economic order quantity,
6) Optimum number of orders per year, ana 2002]
IC.u.B.Com. (Hons.)
Time lag between two orders.
Solution:
Annual consumption =
U=300 x 52 15,600 units
= O= F650
Ordering cost per order
 130 Cost and Management Accounting

Annual stock holding cost per unit

C 2% of R50 x
12 =
R12 [such cost
per month is given]
2Uo 2x15,600 x650
Economic Order Quantity =
=
12
=
y16,90,000 1,300 units

Annual Consumption 15,600 units= 12 orders

number of orders per year
=

Optimum EOQ 1,300units

Time lag between two orders

= months
12
=1 month

Problem 3.4
A company purchases a spare part from its suppliers @ T60 per unit. Annual requirements are
1,600 units.
The following further information are available:
Cost of one procurement 100
Tax, insurance, rent, etc., per unit per annum-2
Annual return on investment-10%
Find out:
(a) Economic order quantity; and (b) Time gap between two consecutive orders.
IC.u. B.Com. (Hons) 20041
Solution:
Annual usage = U = 1,600 units
Ordering cost per order O=100
Carrying cost per unit per annum = C= 2+ 10% of 60 = 78

conomicOrder Quantity = 2u0= 2x160010=

8 40,000 200 units
Number of optimum orders = Annual Usage1,600= 8 orders
EOQ 200

Time gap between two orders =

2months=.5 months
8

Problem 3.5 cu
Consideration of Discount Offer
Sachin Ltd. furnishes the
following information:
Consumption -300 units per quarter; (i) Cost per unit-z40; (Gi) Cost of processing an oraer
(iv) Obsolescence-15%; (v) Insurance on
inventory-25%.
Compute: (a) Economic Order Quantity: ()Number of orders per year; (©) lime 8eP ve
two consecutive orders.
ted?
A supplier offers a discount of 2% on a purchase of 600 units. Shoula itIC.u.
De Hons) 19981
1998]
B.Com. (Hons.)

Solution:
Annual consumption U =300x 4 1,200 units =

Ordering cost per order O =

R600
Carrying cost per unit per annum = C = (15% + 25%) of R40 = (10
=

Economic Order Quantity =

,2u. 2x1,200x600 = 300 units
6
 200
Number of orders per year= 00
300 4 orders
Time gap between two orders =12months - 3 months
4
To decide whether the discount offer is to be accepted, we should see what will be the total materials cost under:
(a) EOQ; and (6) the offer given.
This comparison may be shown as follows:
(a) If EOQ is maintained
Cost of Materials [1,200 x 740]
48,000
Ordering Cost |Number of orders x Cost per order = 4 x T600] 2,400
Carrying cost for 300 units |x300 xT16 2,400
52,800
(b) If 600 units are ordered per requisition
Cost of Materials (98% of T48,000) 47,040
because of 2% discount]
Ordering cost 1,200
INumberoforders = = 2 Cost = 2x T600]
600
Carrying cost
[Per unit cost = 98% of T40 = T39-20

For 600 units:x600x(39.20x 100/ 4,704

52,944
As the comparative cost under (a) is lower, 300 units shuld be purchased at a time.

Problem 3.6
Storage rate is missing
For a product, annual demand is 5,000 units; unit price is 20 and obsolescence rate is 6% per annum.
If the EOQ is 200 units, find out the rate of storage cost where ordering cost is R16 per order.

Solution:
Annual Demand U 5,000units
O = T16
Ordering cost per order
Carrying cost per unit pP.a. x (say)

Economic Order Quantity = 2

or, 200= 2x5,000x16

or,200 /L60,000
X

or, 200= 400 or 200-

or, 4 X =4

Thus, Carrying cost per unit p.a. is {4

and Cost per unit = {20
 x100= 20%
Percentageof carrying cost =

20

Out of this, obsolescence rate is 6%

Storage rate = 20% -

6% = 14%

Problem 3.7
EOQ and Annual Cost of purchasing and storage
A company manufactures a product having a monthly demand of 2,000 units. For one tunit
finished product, 2 kg. of a particular raw materials item is needed. The purchase price of o
the
materials is 20 per kg.
The ordering cost is 120 per order and the holding cost is 10'% per annum. Calculate:

( Economic Order Quantity, and

i) Annual cost of purchasing and storage of raw materials at that quantity.
[Delhi University, B.Com. (Hons) 2004
Solution:
Annual consumption =
U = (2000 x 12) x 2 kg. =
48,000 kg.
Price of materials P 20 per kg.
Annual inventory holding cost =C 10% of K20 =
{2
Ordering cost per order =
O =
T120
Economic Order
Quantity =
2 2x48,000x120= 57,60,000= 2,400 kg
2

Number of orders to be 48,000

placed =

FOO
Total
EOO 2,40020 orders
ordering cost 20 120 2,400=
x

Total holding cost

x2,400 x2 2400
=
=

Purchase cost of
materials =48,000 kg. K20
Annual cost of 9,60,000
purchasing and storage 79,60,000 =

Problem 3.8 +2,400 +

2,400 9,64,800
Calculation of EOQ and stock levels
A company uses
and carrying cost annually
is 15% of
50,000 units of an
item
Find out the average inventory value.costing 1-20 each.
Economic Order Ordering cost is
each

If the
company Quantity.
500 units, find operates 250 days in a year, the
re-order level and
maximum procurement time stock level. is 10
days and safety stock
and
is
sae
Solution:
B.Com. (Hons.) 2003, C.u.- daptedl
i) Economic Order
Quantity 20.0
C
=

Here U =
Annual usage =
50,000 units
 O Ordering cost of each order = 745
C = Carrying cost of one unit p.a. = 15% of T1-20 z0-18

2x50,000x45 45,00,000 2,50,00,000 = 5,000 units

EOQ =
0118 0 18
Re-order Level (ROL) = Safety Stock + Lead time consumption
= 500+(*200 x 10) = 2,500 units

Consumption for 250 days =

50,000 units

50,
Average daily consumption =

250
=
*200 units]
Gil Maximum Stock Level = Re-order Level + Re-order Quantity - Minimum consumption during lead time

2,500 + 5,000 (10 x 200)

= 5,500 units

Problem 3.9 c
S. Enterprise manufactures a special product. The particulars about which are:
(a) Monthly Demand-1,000 units (e) Minimum usage-25 units per week
(b) Cost of placing an order--R100 ( Maximum usage-75 units per week
c)Annual carrying cost per unit-15
(g)Re-orderperiod-4 to 6 weeks
(d) Normal usage-50 units per week
Compute from above:
(i) Re-order Quantity: (ii) Re-order Level; (ii) Minimum Stock Level; (iv) Maximum Stock Level;
and (v) Average Stock Level. ICA. (Inter)]
Solution:

i)Re-orderQuantity = Economic Order Quantity =

U = Annual usage = 12 x 1,000 = 12,000 units

O = Ordering cost for each order = R100
C = Carrying cost per unit p.a. = R15

EOQ 2x12,000x100 - 400 units

N 15
(i) Re-order Level = Maximum re-order period x Maximum usage per week
=6x 75 =450 units
(ii) Minimum Level [Normal usage x Normal lead timel
Re-order Level -

5] 200 units
450 [50 x =

(Minimum usage x Minimum lead

(iv) Maximum Level Re-order Level + Re-order quantity
time)
4) 750 units
450400 -(25
=
x

(VAverage Stock Level =

Maximum Level+2 Minimum Level

750+200 = 475 units

2
Problem 3.11
P Ltd. furnished the following information regarding the details of its manufacturing operation during 2004:
Average monthly market demand 4,600 units
Ordering cost R52 per order
Inventory carrying cost 20% per annumn
Cost of materials 630 per unit
Normal usage 245 units per week
Minimum usage 70 units per week
 Maximum usage units per week
time to supply 4 to 6 weeks
Lead
Maximum
Compute Max Level and Minimum Level of Stock

Ic.u. B.Com. (Hons.) 2005 and 2014

(figures changed))
Solution:

Annual usage U 245 52

Here,
x
12,740 units
Ordering cost O T52 per order
Carrying cost C 20%% of T630 =7126
per unit
2.U.O. 2x12,740 x52
So, Economic
Order Quantity = =
= 103 units
126
Re-order Level =Maximum usage per week x Maximum lead time
380 units x 6 weeks = 2,280 units

Maximum Level Re-order level + Re-order quantity -

(Minimum usage x Minimum lead time)

2,280 units + 103 units - (70 units x 4 weeks)

2,103 units
Minimum Level =Re-order Level -

(Average usage x
Average lead time)
2,280 units - (245 units x 5 weeks)

2,280 units - 1,225 units = 1,055 units

Average lead time = # =5 weeks]

Problem 3.12
Finding out maximum and minimum usage rates and lead time
KT provides you the following information:
(a) Re-order level-64,000 units
(6) Re-order quantity-40,000 units
c) Minimum stock level-34,000 units
d) Maximum stock level-94,000 units
e)
Average lead time in the past has been 2.5 days.
lead time is 3 days.
ne difterence between maximum and minimum
Cmine the Maximum and Minimum Usage Rates and Lead Times.
Ic.u. B.Com. (Hons.) 20091

Solution:
Let the minimum lead time be x days.
themaximum lead time =x + 3 days
So, the average lead time =
+ t days
It
=2:5 days =1 day
6Venthat days x

So, the minimum maximum lead time

=
r + 3 1 +3 =4 days
lead time =1 day and the
 Problem 3.20

Considering Re-ordering Quantity as equivalent to Economic Order Quantity (EOQ)

Calculate maximum level, minimum level and re-ordering level from the following data:
Re-ordering level-1,800 units; Re-ordering period4 to 6 weeks; Minimum consumption-200
units per week; Maximum consumption-300 units per week; Normal consumption-250 units
Cost per unit-{150.
per week; Actual consumption-18,000 units (per annum);
Cost of placing order and processing the delivery is 12 per order. Inventory carrying cost is
B.Com. (Hons.) C.UJ
20
of unit value.
Solution:
Maximum stock level = Re-ordering Level + Re-ordering quantity** - (Minimum consumption x minimum

re-ordering period)
1,800 units + 1,200 units (200 units per weekx 4 weeks)
= 3,000 units - 800 units = 2,200 units
Minimum stock level =Re-order level (Normal consumption x normal re-order period).
= 1,800 units (250 units per week x 5 weeks) = 1,800 units 1,250 units = 550
units

re-order period
= 4+6 5 weeks
Normal
Re-ordering level* Maximum consumption x Maximum Re-order period
300 units per week x 6 weeks 1,800 units

Note:
Fconomic Order Quantity (i.e., Re-ordering quantity)*= 2.U.O.
C

Where, A
= Annual consumption in units =18,000 units
o = Cost of placing the order and processing the delivery 712 per order
C Cost of carrying inventory per unit per year = 20% of R1-50 = T0:30
the tigues as below:
So, we may put

BOQ
2x18,000x2 = y14, 40,000 1,200 units
0 30
Therefore, Economic Order Quantity = 1,200 units

EOQ can be applied when re-order quantity is computed on scientific basis on the principle of minimisation
of materials cost (especially when fixed re-order quantity is followed due to even production throughout the
year). Therefore, Re-order quantity can be considered as equal to EOQ when fixed Re-order quantity is deter-
mined on the basis of principle of minimisation of materials cost].
Problem 3.21
Minimum stock level to allow for emergencies
From the following information, calcualate re-order level, maximum level and minimum level of
stock:
Re-order quantity 6,000 units;
Minimum stock level to allow for emergencies 5 weeks;
Average lead time 4 weeks;
Average consumption per week 500 units
Minimum consumption in 4 weeks 1,600 units. IC.S. (nterAdapted
Solution:
a) Re-order level =Minimum stock level + (Average lead time x Average rate of consumption)

= (5x 500) +(4 x 500) =

2,500 + 2,000 = 4,500 units
6) Maximum stock level Re-order Level + Re-order quantity- (Minimum consumption during lead time)

4,500 + 6,000 1,600 10,500 1,600 8,900 units

=
-
=

c)
Minimum stock level Re-order level -

(Average consumption x
average lead time)

(500 4) 4,500 2,000 2,500 units

4,500 x =

Problem 3.22
Various stock levels for a component-parts
actory, component-A is used as follows: Maximum usage-75 kg. per
per week;
per week; Minimum usage 25 k8
e-50 kg.
week; Re-order q
quantity-300 kg.; Re-order period4 to 6 weeks.
Cal d e r
Calculate for com
iv)AIorcomponent-A: (i) Re-order
Level; (ii) Maximum Level; (ii) Minimum Level;
and
Ic.u. B.Com. (Hons.)]
Average Stock Level.
142 Cost and Management Accounting
Solution:
i) Re-order Level: Maximum Consumption x Maximum Lead Time
= 75 kg. per week x 6 weeks =450 kg.
Gi) Maximum Level: Re-ordering Level + Re-ordering quantity - (Minimum Usage Minimum lead
time)
=
450+300 (25 x 4) =
750 - 100 650 kg.
=

iii) Minimum Level: Re-ordering Level [Normal Consumption (usage) x Normal re-order period]

450 50x(4 =450 250 200 kg.

iv) Average Stock Level: =

(Maximum Level + Minimum Level) =
[650 200] = 425 kg.