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Saturday, November 24, 2012

MGT402 Assignment no 1 Solution DUE DATE: 26TH NOVEMBER, 2012



COST &MANAGEMENT ACCOUNTING (MGT402)
FALL 2012
ASSIGNMENT NO. 1
DUE DATE: 26TH NOVEMBER, 2012
MARKS: 20
TOPIC TO BE TESTED:
Material controlling through Economic order Quantity – EOQ
LEARNING OBJECTIVES:
 To learn about the ways to get control over material by most economical order quantity.
 To learn about the total ordering cost and total carrying cost.
 To learn about the decision making process for choosing suitable proposal on EOQ with the help of
total carrying cost, total ordering cost and total cost basis.
ASSIGNMENT QUESTION
PUNJNAD Textile Industries (PTI) – a privately owned textile spinning unit is engaged in yarn manufacturing
since its incorporation. The unit produces high quality yarn which is sold out immediately like a hot cake. 5
years back, Mr. Entrepreneur - the owner of PTI had signed a contract with a local cotton supplier – Mr.
Supplier for supplying fine quality cotton bails to PTI as per specified requirement for five years at a cost of
Rs. 500 per bail. PTI estimated its requirement of 12,500 cotton bails per year for smooth operations. Both the
owner and the supplier were happy for signing the contract and a feeling of earning the good amount of profit.
Mr. Entrepreneur also estimated Rs. 2,000 as cost on issuing every new order and 10% as carrying and storage
cost associated with the inventory.
Mr. Supplier successfully supplied the cotton bails to PTI for 4 years but in 5th year of the contract, due to
heavy flood, cotton crops could not be reaped at full. But, due to the signed contract with PTI, Mr. Supplier
managed to supply cotton bails to PTI as per the agreed specification and completed the contract period
successfully.
This year, due to bumper cotton crop in the region, Mr. Supplier has desired to renew the cotton supply
contract with the condition to supply 25% extra bails over the previous contract for the next 5 years. Mr.
Entrepreneur as satisfied with the cotton quality supplied earlier is considering this new option and has called
upon his manager costing – Mr. Management Accountant to compare the proposal with the contract just
ended. The manager has advised him to reject the proposal as extra quantity purchased would increase the
carrying and storage cost by 2%.
REQUIREMENT:
Being a student of cost & management accounting you are asked to calculate the following:
1. The most economical order quantity in case of both the proposals (current as well as previous)
2. The total ordering cost which has to be borne by PTI on both the proposals (current as well as
previous)
3. The total Carrying cost which has to be borne by PTI on both the proposals (current as well as
previous)
4. Using the order quantities, total ordering cost and total carrying cost calculated above; calculate the
total cost for both proposals. Also suggests the most suitable proposal for PTI on total cost basis.
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Full Solution Coming Soon........
            
    EOQ=1000 IN BOTH CASES
TOTAL ORDERING COST=25000 AND 39000
TOTAL CARRYING COST=312500 AND 610352
SO as a cost manager it is expensive to get 25% as it costs more Ordering Cost & Carrying Cost.
Solve by yourself and if the answers are not correct then share the correct answers. Thanks

-------------------------------------------------------------------------------------

Previous ContractOrder
 QtyRequired
 UnitsNo of
OrdersPer Order
Cost Total Ordering
Cost  Average Ordering
Qty  Carring Cost Per Unit Total Carring
CostTotal Cost2000125006.252000                 12,500      1,000                      50     50,000        62,5001800125006.942000                 13,889          900                      50     45,000        58,8891500125008.332000                 16,667          750                      50     37,500        54,16712001250010.422000                 20,833          600                      50     30,000        50,83310001250012.502000                 25,000          500                      50     25,000        50,000 EOQ 7001250017.862000                 35,714          350                      50     17,500        53,2145001250025.002000                 50,000          250                      50     12,500        62,5003001250041.672000                 83,333          150                      50        7,500        90,833         Proposal ContractOrder
 QtyRequired
 UnitsNo of
OrdersPer Order
Cost Total Ordering
Cost  Average Ordering
Qty  Carring Cost Per Unit Total Carring
CostTotal Cost1300125009.622000                 19,231          650                      60     39,000        58,2311270125009.842000                 19,685          635                      60     38,100        57,78512501250010.002000                 20,000          625                      60     37,500        57,5009131250013.692000                 27,382          457                      60     27,390        54,772 EOQ 8751250014.292000                 28,571          438                      60     26,250        54,8216251250020.002000                 40,000          313                      60     18,750        58,7505001250025.002000                 50,000          250                      60     15,000        65,000         


--------------------------------------------------------------------------------------------






Per Unit Cost
Annual Required Units
Ordering Cost for One Order
Carrying Costs

Previous Contract
500
12,500
2000
10%
Proposed Contract
500
15,625
2000
12%
Moving on , 
EOQ = [(2xRUxOC)/(UCxCC%)]^1/2
Total Ordering Cost= Required Units/Order Quantity = Number of Orders
                                = Number of Orders x Cost per Order
Total Carrying Cost    = Ordering Quantity/2 = Average Ordering Quantity
                                                                 =Carry Cost per Unit = Unit Cost x CC%
                                                                       = Average Ordering Quantity x Carrying Cost Per Unit
Total Cost = Total Ordering Cost x Total Carrying Cost
Per Unit Cost = Total Cost/Order Quantity 


Order Quantity
Total Ordering Cost
Total Carry Cost
Total Cost
Per Unit Cost
Previous Contract
1000
25000
25000
50000
50
Proposed Contract
1020.6
31250
30618
 61868
60.62

 





----------------------------------------------------------------------------------


                     The economic order quantity (Previous Proposal)

EOQ=1000

The economic order quantity (Current Proposal)

EOQ=1000

Total ordering cost (Previous Proposal)

25000 

Total ordering cost (Current Proposal)

39062.5

Total carrying cost (Previous Proposal)

312500 

Total carrying cost (Current Proposal)

610351.5625 

Total cost (Previous Proposal)

337500

Total cost (Current Proposal)

649414.0625

Previous proposal is suitable proposal for PTI


-----------------------------------------------------------------------------------

total OC ACTUAL = 3125

Total OC PROPOSED = 3906.25

Total CC Actual = 50000

Total CC Proposed = 5000

Total Cost Present = 53125

Total Cost Proposed = 53906.25 

If we want to counter check this with manager statement for increase of 2 % , here the difference between two Total Cost is exactly 2%.

-------------------------------------------------------------------------------

Annual consumption=12500

Cost to place one order=2000

Cost per unit=500

carrying cost=10%

And in case of 25% increase

Annual consumption=15625 after 25% increase

Cost to place one order=2500 after 25% increase

Cost per one cottom bail=625 after 25% increase

Carrying cost=12.5% after 25% increase

-----------------------------------------------------------------------------


Name:                                                                    IIU
ID                                                                          apna apna
Subject                                                                 Cost and Management Accounting(MGT402)
Assignment #                                                        01


Answer:

          Economic Order Quantity in Previous Proposal:

  
      Required Quantity= Rq= 12,500
      Ordering Cost        = Co= 2,000
      Inventory Unit cost =Uc= 500 per bail
     Carrying & Storage Cost 10% Uc=Cc= 50
     As Economic Ordering Quantity;
                            

EOQ = (2(Rq*Co/Uc*Cc) ^ (1/2)
                          = (2(12,500*2,000)/ (500*s50) ^ (1/2) 
                         = (2000) ^ (1/2)
                       

 EOQ   = 145 units
  
 The most economical order quantity in case of previous proposals is 45 units.


Economic Order Quantity in Current Proposal:

     New Required quantity= Rnq= 15,625 (N-1)
     Carrying & Storage Cost 2% Uc=Cc= 10
 Economic Order Quantity; 
                                     

 EOQ = (2(Rq*Co/Uc*Cc) ^ (1/2)
                                                = (2(15625*2,000)/ (500*10) ^ (1/2)
                                                =    (12,500) ^ (1/2)
                                             
  =   112     units                                       

The most economical order quantity in case of current proposal is 112 units.

     





Answer # 2
       

The total ordering cost which has to be borne by PTI on both the proposals:


Ordering Cost in Previous Proposal:

Ordering Cost = Number of orders x Cost per order
                          = 86(N-2)*2,000
                          = 172,414          ……………………….. A
        

                            
       Ordering Cost in Current Proposal:
              Ordering Cost = Number of orders x Cost per order
                                       =    140(N-3) * 2,000
                                       =    279,018 …………………….. B        
         
Total Ordering Cost = A+ B

                                   = 451,432
                                                                                


Answer # 03

           The total Carrying cost which has to be borne by PTI on both the      proposals:
         
   Carry cost on the Previous Proposal;
                                  Average ordering quantity x carrying cost per unit
                                                 
 = 6,250*25,000
                
Total carrying cost = Rs. 156,250,000 ……………. A

Carry cost on the Current Proposal;
                                  Average ordering quantity x carrying cost per unit
                                               
   = 7813*5,000
                
Total carrying cost = Rs. 39,062,500 ………………. B

 Total Carrying cost on both the Proposal = A+B
                                                                
      = 195,312,500



Answer #4
        

Total cost for the Previous Proposal:
                     = order quantities (total ordering cost + total carrying cost)
                    = 145 (172,414+ 156,250,000)
                    = Rs. 22,681,250,000

         Total cost for the Current Proposal:
                    = 112* (279018+ 39,062,500)

                    = Rs. 4,406,250,000

The total cost for the Current Proposal is less than Previous Proposal So , the Current Proposal for the PTI is most suitable on the cost basis.

  
Working:
     N-1.
       Previous required quantity                  = Rq= 12,500
       25 %Increased due to new contract   =            3,125
                                                                               15,625
        N-2.
      No of Orders = Required Units/Orders Quantity
                             = 12,500/145
                             = 86
       
N-3.
      No of Orders = Required Units/Orders Quantity
                             = 15625/112
                             = 140
                       



                                    

9 comments:

  1. Solution
    EOQ=1000 IN BOTH CASES
    TOTAL ORDERING COST=25000 AND 39000
    TOTAL CARRYING COST=312500 AND 610352
    SO as a cost manager it is expensive to get 25% as it costs more Ordering Cost & Carrying Cost.
    Solve by yourself and if the answers are not correct then share the correct answers. Thanks
    ………………..
    The economic order quantity (Previous Proposal)
    EOQ=1000
    The economic order quantity (Current Proposal)
    EOQ=1000
    Total ordering cost (Previous Proposal)
    25000
    Total ordering cost (Current Proposal)
    39062.5
    Total carrying cost (Previous Proposal)
    312500
    Total carrying cost (Current Proposal)
    610351.5625
    Total cost (Previous Proposal)
    337500
    Total cost (Current Proposal)
    649414.0625
    Previous proposal is suitable proposal for PTI
    …………………………
    My solution is slightly different,
    total OC ACTUAL = 3125
    Total OC PROPOSED = 3906.25
    Total CC Actual = 50000
    Total CC Proposed = 5000
    Total Cost Present = 53125
    Total Cost Proposed = 53906.25
    If we want to counter check this with manager statement for increase of 2 % , here the difference between two Total Cost is exactly 2%.
    ——————————————-
    Annual consumption=12500
    Cost to place one order=2000
    Cost per unit=500
    carrying cost=10%
    And in case of 25% increase
    Annual consumption=15625 after 25% increase
    Cost to place one order=2500 after 25% increase
    Cost per one cottom bail=625 after 25% increase
    Carrying cost=12.5% after 25% increase
    ——————————————-
    in my opinion first we have to find the EOQ, Total ordering cost, total carrying cost and total cost for both the contracts.
    contract 1
    RU=12500
    OC = 2000
    Uc = 500
    CC = 10% of UC
    similarly for proposed contract:-
    RU = original RU + 25% = 15625,
    OC = 2000
    Uc = 500
    CC = 12% of UC
    formulas for EOQ, Total Ordering Cost and total carrying cost are given on page 56 and 57 of handouts, just put in these values and get the answers. in the end find total cost per contract the formula for total cost = total ordering cost + total carrying cost put the values for both the contracts in this formula and then finally compare both the contracts to see which one is cheaper.

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