A Ltd. produces a product ‘X' using a raw material D. To produce one unit of X, 2 kg of D is required. As per the sales forecast conducted by the…

CA Intermediate · Cost and Management Accounting · MTP · September 2025
A Ltd. produces a product ‘X' using a raw material D. To produce one unit of X, 2 kg of D is required. As per the sales forecast conducted by the company, it will able to sale 10,000 units of X in the coming year. The following is the information regarding the raw material D: (i) The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ). (ii) Maximum consumption per day is 20 kg. more than the average consumption per day. (iii) There is an opening stock of 1,000 kg. (iv) Time required to get the raw materials from the suppliers is 4 to 8 days. (v) The purchase price is 125 per kg. There is an opening stock of 900 units of the finished product X. The rate of interest charged by bank on Cash Credit facility is 13.76%. To place an order company has to incur 720on paper and documentation work. From the above information, FIND out the followings in relation to raw material D: (i) Re-order Quantity (ii) Maximum Stock level (iii) Minimum Stock level (iv) Calculate the impact on the profitability of the company by not ordering the EOQ. [Take 364 days for a year]

Suggested Answer and Working Notes:

Working Notes: (1) Computation of Annual consumption & Annual Demand for raw material 'D' Sales forecast of the product 'X' 10,000 units Less: Opening stock of 'X' 900 units Fresh units of 'X' to be produced 9,100 units Raw material required to produce 9,100 units of 'X' (9,100 units x 2 kg.) 18,200 kg. Less: Opening Stock of 'D' 1,000 kg. Annual demand for raw material 'D' 17,200 kg. (2) Computation of Economic Order Quantity (EOQ) EOQ = 2 × Annual demand of 'Dee'x Ordering cost √Carrying cost per unit per annum = 2 × 17,200 kg. × 720 √125 × 13.76% = 2 × 17,200 kg. x 720 = 1,200 kg. √17.2 (3) Re- Order level = (Maximum consumption per day × Maximum lead time) = Annual Consumption of 'Dee' + 20 kg. x 8 days 364 days = ( 18,200 kg. + 20kg.) x 8 days = 560 kg. 364 days (4) Minimum consumption per day of raw material 'D' Average Consumption per day = 50 Kg. Hence, Maximum Consumption per day = 50 kg. + 20 kg. = 70 kg. So, Minimum consumption per day will be Average Consumption = Min.consumption+Max.consumption 2 Or, 50 kg. = Min.consumption+70 kg. 2 Or, Min. consumption = 100 kg - 70 kg. = 30 kg. (i) Re-order Quantity EOQ – 200 kg. = 1,200 kg. – 200 kg. = 1,000 kg. (ii) Maximum Stock level = Re-order level + Re-order Quantity – (Min. consumption per day × Min. lead time) = 560 kg. + 1,000 kg. – (30 kg. × 4 days) = 1,560 kg. – 120 kg. = 1,440 kg. (iii) Minimum Stock level = Re-order level – (Average consumption per day × Average lead time) = 560 kg. – (50 kg. × 6 days) = 260 kg. (iv) Impact on the profitability of the company by not ordering the EOQ When purchasing the ROQ When purchasing the EOQ I Order quantity 1,000 kg. 1,200 kg. II No. of orders a year 17,200kg. = 17.2 or 18 orders 17,200kg. = 14.33 or 15 orders 1,000kg. 1,200kg. III Ordering Cost 18 orders × ₹ 720 15 orders × ₹ 720 = 12,960 = 10,800 IV Average Inventory 1,000 kg. = 500 kg. 1,200 kg. = 600 kg. 2 2 V Carrying Cost 500 kg. x 17.2 600 kg. x 17.2 = 8,600 = 10,320 VI Total Cost 21,560 21,120 Extra Cost incurred due to not ordering EOQ = 21,560 -21,120 = 440

Topics: Material Cost

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