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Cost & Management Accounting (Mgt-402) Solution Assignment 02

Summer Session 2007

Solution to Question 01:

Following estimates relate to the material XY-9:

Annual requirement of XY-9 12,000 Units


Variable cost to place an order Rs. 10
Unit Cost of XY-9 Rs. 4.80
Carrying Cost 5%

Required:

a) Calculate EOQ from the data given above


b) Calculate after how many days an order shall be placed

Part A:

In order to find out the EOQ of dints first we have to calculate

RU = Annual Requirements = 12,000 units

Ordering Cost (OC) = Rs. 10

Carrying Cost (CC) = Rs. 4.8 * 0.05 = 0.24

EOQ = √ 2 X Annual requirement X OC / CC

EOQ = √ 2 X 12,000 X 10 / 0.24

EOQ = √ 240,000/0.24

EOQ = √1,000,000

EOQ = 1,000 units

Part B:

Annual
No. of Ordering Ave. Carrying Total
Requirement Order Size
Orders (1) Cost Inventory Cost cost
s
12,000 Units 800 units Rs. 15 Rs. 150 400 units Rs. 96 Rs. 246
12,000 Units 1,000 units Rs. 12 Rs. 120 500 units Rs. 120 Rs. 240

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Cost & Management Accounting (Mgt-402) Solution Assignment 02

Summer Session 2007


12,000 Units 1,200 Units Rs. 10 Rs. 100 600 units Rs. 144 Rs. 244

1. Ordering Cost @ Rs. 10 per order


2. Average Inventory = EOQ/2
3. Carrying Cost @ Rs. 0.24 per unit (i.e. Rs. 4.80 X 5%)

Number of days after which an order should be placed:

= 365 days / number of orders


= 365 days / 12 orders
= 30.41 or 30 days

(Continue to next page)

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Cost & Management Accounting (Mgt-402) Solution Assignment 02

Summer Session 2007

Solution to Question 02:

Consumption forecast of two materials A and B is as follows:

Maximum daily consumption 600 Units


Average daily consumption 500 Units
Minimum daily consumption 400 Units

A B
Lead Time 4-8 days 3-5 days
Lead Time to get urgent supplies 3 days 1 day
5000
EOQ units 3000 units

Calculate for each of the materials:


a) Order Level
b) Minimum level
c) Maximum level
d) Danger level

Solution

Order Level = Maximum Consumption during lead time

Material A = 600 units x 8 days = 4800 units


Material B = 600 units x 5 days = 3000 units

Minimum Level = Order level – Average consumption during lead time

Material A = 4800 units – (500 units x [4+8]/2 days) = 1800 units


Material B = 3000 units – (500 units x [3+5]/2 days) = 1000 units

Maximum Level = Order level – (Min. consumption during lead time) + EOQ

Material A = 4,800 units – (400 units X 4 days) + 5,000 units = 8,200 units
Material B = 3,000 units – (400 units X 3 days) + 3,000 units = 4,800 units

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Cost & Management Accounting (Mgt-402) Solution Assignment 02

Summer Session 2007


Danger Level = Average consumption during lead time for urgent supplies

Material A = 500 units X 3 days = 1,500 units


Material B = 500 units X 1 days = 500 units

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