Rs 2 4,000 120 2.400 2 2 2 AB 2 x 48,000 units x Rs 120 EOQ - - 2,400 units A = 4,000 units per month X 12 months = 48,000 units C = 20 cost per unit x 0.10 = 2 per unit per annum (ii) Determination of Extra Cost uben Lot Size is 4,000 Units Particulars Cost when lot size is 4,000 units 2,400 units 1. Annual usage (units) 48,000 48,000 2. Size of order 2,400 3. Number of orders ( 12) 12 20 4. Cost per order 3120 5. Total ordering costs (3 X 4) 1.440 6. Carrying cost per unit per annum 7. Average Inventory (size of order/2) 2.000 1,200 8. Total carrying cost (6 x 7) $4,000 2,400 9. Total costs (5 + 8) 35.400 34,800 Extra costs to be incurred is 2640 65,440 34,800), when the order size is 4,000 units. (iii) There is a positive relationship between the total carrying cost the firm incurs and the size of the average intentory it carries this average size of intentory, in turn, is positively related to the size of order. In view of these facts, the minimum carrying costs, the firm is to incur is +2.400 (correspond- ing to EOQ of 2,400 units and the average intentory level of 1,200 units) P.8.14 A company manufactures a product from a raw material, which is purchased at 60 per kg. The company incurs a handling cost of 360 plus freight of $390 per order. The incremental carrying cost of inventory of raw material is 20.50 per kg. per month. In addition, the cost of working capital finance on the investment in inventory of raw material is 39 per kg per annum. The annual production of the product is 1,00,000 units and 2.5 units are obtained from one kg of raw material. REQUIRED: (i) Calculate the economic order quantity of raw materials. (ii) Advise, how frequently should orders for procurement be placed. (iii) If the company proposes to rationalise placement of orders on quarterly basis, what percentage of discount in the price of raw materials should be negotiated? y29