A Company manufactures a special product which requires a component 'Alpha'. The following particulars are collected for the year 2022-23: (i)…

CA Intermediate · Cost and Management Accounting · MTP · January 2026
A Company manufactures a special product which requires a component 'Alpha'. The following particulars are collected for the year 2022-23: (i) Annual demand of Alpha 8,000 units (ii) Cost of placing an order 200 per order (iii) Cost per unit of Alpha - 400 (iv) Carrying cost p.a. 20% The company has been offered a quantity discount of 4% on the purchase of 'Alpha' provided the order size is 4,000 components at a time. Required: (i) COMPUTE the economic order quantity (ii) STATE whether the quantity discount offer can be accepted.

Suggested Answer and Working Notes:

(a) (i) Calculation of Economic Order Quantity EOQ = √(2AO / C) = √(2 × 8,000 units × 200 / (₹ 400 × 20/100)) = 200 units (ii) Evaluation of Profitability of Different Options of Order Quantity (a) When EOQ is ordered (₹) Purchase Cost (8,000 units × 400) 32,00,000 Ordering Cost [(8,000 units/200 units) × ₹ 200] 8,000 Carrying Cost (200 units × 400 ×1/2 ×20/100) 8,000 Total Cost 32,16,000 (b) When Quantity Discount is accepted (₹) Purchase Cost (8,000 units × 384*) 30,72,000 Ordering Cost [(8,000 units/4000 units) × ₹ 200] 400 Carrying Cost (4000 units × 384 ×1/2 ×20/100) 1,53,600 Total Cost 32,26,000 *Unit Cost = 400 Less: Quantity Discount @ 4% = 16 Purchase Cost = 400 - 16 = 384 Advise - The total cost of inventory is lower if EOQ is adopted. Hence, the company is advised not to accept the quantity discount.

Topics: Material Cost

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