Aditya Ltd. has a monthly requirement for an item of raw material is 1,000 units. The purchase price per unit of material is 60. The cost of…

(i) Calculation of optimum purchase order size or Economic Order Quantity (EOQ): EOQ = √(2 × A × O) / (C × i) Where, A = Annual requirement for inventory = 1,000 units × 12 months = 12,000 units O = Ordering cost = 540 C = Cost per unit = 60 C × i = Carrying cost per unit per annum = 20% × ₹ 60 = 12 EOQ = √(2 × 12,000 units × 540) / 12 = √(1,29,60,000) / 12 = 1,039.23 or 1,039 units. (ii) Calculation of order level where the company could have minimised its total cost: Order Size (in units) 1,500 2,000 4,000 6,000 8,000 No. of order 8 6 3 2 1.5* Cost per order (₹) 540 540 540 540 540 Average inventory 750 1,000 2,000 3,000 4,000 Cost per unit (₹) 60.00 59.80 59.50 58.90 58.40 Carrying cost per unit @ 20% (₹) 12.00 11.96 11.90 11.78 11.68 (a) Ordering Cost (₹) 4,320 3,240 1,620 1,080 810 (b) Carrying cost (₹) 9,000 11,960 23,800 35,340 46,720 (c) Material cost (₹) 7,20,000 7,17,600 7,14,000 7,06,800 7,00,800 Total Cost {(a) + (b) + (c)} (₹) 7,33,320 7,32,800 7,39,420 7,43,220 7,48,330 *This may also be taken as 2 orders At order level of 2,000 units, the total cost to the company is least. (iii) Calculation of amount of loss due to bank's inability to process more than five fund transfer requests: Amount (₹) No. of orders 5 Purchase quantity per order (12,000 units ÷ 5) 2,400 units Cost per unit 59.80 (a) Ordering Cost (₹ 540 × 5 orders) 2,700 (b) Carrying Cost (20% of 59.80 × 1,200 units) 14,352 (c) Material Cost (₹ 59.80 × 12,000 units) 7,17,600 Total Cost {(a) + (b) + (c)} 7,34,652 Minimum cost at 2,000 units order level 7,32,800 Loss 1,852