Tesco cycles Ltd. used about 3,60,000 cycle locks per annum and the usage is fairly constant at 30,000 per month. The cycle lock costs 240 each at…

CA Intermediate · Cost and Management Accounting · PYQS · May 2024
Tesco cycles Ltd. used about 3,60,000 cycle locks per annum and the usage is fairly constant at 30,000 per month. The cycle lock costs 240 each at wholesale rate and carrying cost is estimated to be 10% of the annual average inventory value. The cost to place an order is 1200. It takes 45 days to receive delivery from the date of order. In order to avoid any kind of disruption in assembly line, safety stock of 6,500 cycle locks is always maintained by Tesco Cycles Ltd. (Assume 360 days in a year). Compute: (i) E.O.Q. (ii) The re-order level. (iii) The company has been offered a quantity discount of 2% on the purchase of cycle locks provided the order size is 30,000 units at a time. Advise whether quantity discount offer can be accepted?

Suggested Answer and Working Notes:

(a) (i) Calculation of Economic Order Quantity EOQ = √(2AO/C) = √(2 × 3,60,000 units × ₹ 1200 /24) = 6,000 units Where, A = Annual Demand = 3,60,000 units O = Ordering cost per order = 1200 C = Inventory carrying cost per unit per annum = 10% of 240 = 24 (ii) Re-order Level = Safety Stock + Lead Time Consumption = 6,500 + (1,000 x 45) units = 51,500 units Or, Minimum level of cycle locks + [Average rate of consumption x Average time required to obtain fresh delivery] = 6,500 + (1,000 x 45) units = 51,500 units (iii) Evaluation of Profitability of Different Options of Order Quantity (a) When EOQ is ordered (order size of 6,000 units) (₹) Purchase Cost (3,60,000 units × 240) 8,64,00,000 Ordering Cost [(3,60,000 units/6,000 units) × ₹ 1,200] 72,000 Carrying Cost (6,000 units × ₹ 240 × 1/2 × 10/100) 72,000 Total Cost 8,65,44,000 (b) When Quantity Discount is accepted (order size of 30,000 units) (₹) Purchase Cost [3,60,000 units × 235.2 (240-4.8)] 8,46,72,000 Ordering Cost [(3,60,000 units/30,000 units) x 1,200] 14,400 Carrying Cost (30,000 units × ₹ 235.2 x 1/2 × 10/100) 3,52,800 Total Cost 8,50,39,200 Advise – The total cost of inventory is lower if discount is accepted. Hence, the company is advised to accept the quantity discount.

Topics: Material Cost

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