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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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Replies to This Discussion

Dear Tariq bhai,

kindly update the whole solution of assignment. as soon as possible.

bilal khokhar ok i will try my best ...

i will be thankful to you if u upload the complete solution. 

Tariq bhai upload kr do solution plzzzzzzzzzzzzz

plzzzzzzzzzzz kar day

carrying cost 2% increase ho gi means 10% se 12% ho jae gi 25% ni

bhai eska solution he upload kr doo khuch samjh nai aa rai

picture upload na karo. solutionupload karo. time kam hai aur kaam zyada

Perfect Solution:

Here is what I think, since we have a bumper cotton crop, we will not increase any other prices except for the ones asked by the question.

That way:

 

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 + Total Carrying Cost

Per Unit Cost = Total Cost/Order Quantity 

 

 

Order Quantity (EOQ)

Total Ordering Cost

Total Carry Cost

Total Cost

Per Unit Cost

Previous Contract

1000

25000

25000

50000

50

Proposed Contract

1020.6

30619

30618

 61237

60

Hence Accountant is right and previous proposal is suitable for PTI.

Good Luck & best of luck 


And Thank You Nadia for gr8 help  GOD BLESS!!

Note: for more help see vdo lecture # 9 & chk from handouts as well.. page 56-57 

Thank you for pointing out my mistakes 
Hope everyone gets good marks! 

u r welcome

IN SHA ALLAH

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