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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.

Views: 10051


Replies to This Discussion

there is another question asked on MDB..

Dear sir/mam Is the carrying cost 10% and 12% for each proposal as of unit cost or total inventory ?and the total cost to be determined for each is for 5 yrs duration or for 1 yr duration? Plz explain.
Post Your Comments
Other Students' Comments: 0

Instructor's Reply:

Dear Student:

I appreciate your question. The answer of your question is given as:

The carrying cost given in the question is associated with the inventory (mention in the question).

As for as, your second question is concerned, you are supposed to calculate the total cost of the contracts.

ab is ka kia matlab hai??

yes, I checked both of these. The one u posted there, is nt clear answer. May be the teacher doesn't want to clear. And mostly they don't reply this type of questions which are related to Discussions or Assignment........... Don't know how he replied like this which is wrong according to me, as I understand...

bht e confusio dali hai inho ne  sara din isi pe waste ho gaya & in edn grading sirf 10% :( kia faida itni mehnat ka  anyways mein to ab as per instructior assignment kerne laga hun.....10% of 12500 & 12% of 15625... let see kia banta hai....

final solution already posted above...check previous page..

JAZAK ALLAH miss tauras  

ap 1 baat bataen gi k how can we tag some one?? like u did me twice so ye kaise kiya?? 

+ ((( Mἷṩṩ ҭᾄὗʀᾄṩ ))) 

four proposals nahi, four parts of question... we have to find EOQ, TOC, TCC & TC... and ji the solution i uploaded us mein all four parts k ans hain....

+ ((( Mἷṩṩ ҭᾄὗʀᾄṩ ))) meine ap ko apni solution wali post k neeche tag kiya my reply there...

+ ((( Mἷṩṩ ҭᾄὗʀᾄṩ ))) email me at

kha per ha plz bata day

Azmay, previous pages chk karen...

Dear plz show proper formulas

Naeem Khalil formulas are written... baqi ap handouts pages 56-57 dekh len & step by step ker lein.... do something on ur own too dear 


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