Ani Ltd. uses 6 kg. of Material 'EXE' to produce 1 finished unit of Product 'EME'. The current demand of Product ‘EME' is 16,000 units quarterly. 1…

Annual demand of material 'EXE' = 16,000 units (per quarter) x 4 (No. of Quarter in a year) x 6 kg. (for every finished product) = 3,84,000 kg. (i) Calculation of Economic Order Quantity (EOQ) for material 'EXE' EOQ = (2 x Annual demand x ordering cost) / (Carrying cost per unit per annum) = (2 x 3,84,000 kg. x 2,000) / (40x 15%) = 16,000 kg. (ii) Evaluation of Cost under different options of 'order quantity'. Particulars When EOQ is ordered When discount of 2.5% is accepted and supply is in 4 equal installments Order size 16,000 kg. 96,000 kg. No. of orders 24 (3,84,000 kg. / 16,000 kg.) 4 (3,84,000 kg. / 96,000 kg.) Purchase Cost per kg. 40 39 {40 - (40x 2.5%)} Total Purchase Cost (A) 1,53,60,000 (3,84,000 kg. x 40) 1,49,76,000 (3,84,000 kg. x 39) Ordering Cost (B) 48,000 (24 orders x 2,000) 8,000 (4 orders x 2,000) Carrying Cost (C) 48,000 (16,000 kg. / 2 x 15% x 40) 2,80,800 (96,000 kg. / 2 x 15% x 39) Total Cost (A + B + C) 1,54,56,000 1,52,64,800 COMMENT – The total cost is lower if Ani Ltd. accept an offer of 2.5% discount by the supplier, when supply of the annual requirement of material 'EXE' is made in 4 equal installments.