Intermediate: Calculation of EOQ Most textbooks consider that the optimal re-order quantity for materials occurs when ‘the cost of storage is equated with the cost of ordering’. If one assumes that this statement is acceptable and also, in attempting to construct a simple formula for an optimal re-order quantity, that a number of basic assumptions must be made, then a recognised formula can be produced using the following symbols:

You are required:

(a) to present formulae, using the symbols given above, representing:
(i) total cost of ordering, (ii) total cost of storage, (iii) total cost of ordering and storage, (iv) optimal re-order quantity; (4 marks)

(b) to state the limitations experienced in practice which affect the user of the formula for optimal re-order quantity as expressed in (a)
(iv) above; (4 marks)

(c) to calculate the optimal re-order quantity from the following data:
Cost of storage is 20% per annum of stock value Cost of placing an order is £30 each Demand for material is 2000 units per annum Price of material is £70 per unit;
(3 marks)

(d) to explain a system of stock usage which renders economic order quantity re-ordering obsolete. (4 marks)
(Total 15 marks) CIMA Stage 2 Cost AccountingLO1

Transcribed Image Text:

Co cost of placing an order Ch =cost of storage per annum, expressed as a percentage of stock value D = demand in units for a material, per annum Q = re-order quantity, in units Q/2 average stock level, in units = p =price per unit