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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
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%.
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
3. The total Carrying cost which has to be borne by PTI on both the proposals (current as well as
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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Replies to This Discussion

ji ji afcrs ab answers different aen ge q k pehle hum per year calculate ker rahhe the but ab 5yrs ki calculation ki hain so answers diff aen ge... meine final calculations jo likhi hain wo 5yrs ki hain.. & u can see answers sab k different hain...

and no need of sorry...hum logo ik dosre ki help nahi karenge to kon kare ga...VU walo se to kuch expect ker nahi sakte 

Buhat buhat shukria apka bro Allah bless you take care ALLAH HAFIZ.

JAZAK ALLAH dear..duaon mein yaad rakhiye ga  ALLAH HAFIZ

Rizwan bhai 4 years tk eoq same nahi rahey gi sirf 5th year main increase hoi haina????

here the calculations for more help 

previous proposal 

EOQ    = √ [(2*62,500*2000) / (500*10%)] = 2236.1

TOC = 28 * 2,000 = 14,000      (Number of orders = 62,500 / 2,236.1= 28)

TCC = 1,118.1 * 50 = 55,905  (Average Ordering Quantity= 2,236.1 / 2 = 1,118.1)(Carrying Cost per Unit =500 * 10% = 50)

Total Cost = 14,000 + 55,905 = 69,905

per unit cost = 69,905/2,236.1=31.26

current proposal

EOQ    = √ [(2*78,125*2000) / (500*12%)] = 2282.2

TOC = 34.23 * 2,000 = 68,460      (Number of orders = 78,125 / 2,282.2 = 34.23)

TCC = 1,141.1 * 60 = 68,466   (Average Ordering Quantity = 2,282.2 / 2 = 1,141.1)(Carrying Cost per Unit= 500 * 12% = 60)

Total Cost = 68,460 + 68,466 = 136,926

per unit cost = 136,926/2,282.2=60

hope it will b helpful now  bas is ko step by step kerna calculations nahi kerni...

Thanks rizwan bhai

Me ap sb ko aik advise dena chahta ho. plz show the all steps and calculation which we use in the case. It would be very helpful for those student who can not attend the all video lecture.

You done a better and i appreciate your work brother.

Thanx a lot and i received lots of help from your ideas. My concepts are clear. Thanks again and wish u best of luck.

kon sa solution thk hy plzzzzzzzzzzzzzzzzzzzzzz bta dain 

Ozair Akram solution posted on previous page, as per our understanding, is right...  u can make ur assignment according to that solution. 

Mahmood Ahmad JAZAK ALLAH  

lekin agar step by step calculations dikha den ge to students khud to samjh enahi paen ge..they will jst copy & kuch to unko khud bhi kerna chaiye ta k unko samjh bhi ajae... baqi handouts pages nu 56-57 per step by step details di gai hain....

Dear Rizwan Ahmed, how ur TOC is 28*2000 = 14000??? it should be 56000 or am i missing any step? plz guide

Asif Iqbal oh yes u r rite... sorry mis typed.. its 56,000.. 

aap ki TC calculation b isi pe ha isko sahi kar len



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