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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: 10054


Replies to This Discussion

See above, whats opinion now?

totol cost is 50000 oc and cc 25000 each in previous

in present 62500 nd 31250 each

is it right or not 

Lec 9

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





Proposed Contract





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






Proposed Contract






Hence Accountant is right.

Nadia kindly check for total ordering cost of proposed project, according to my calculations it comes 30619, as 15625/2000 = 1530.96 x 2000 = 30619. kindly please check and confirm us. thanks a lot 

= 15625/1020.6 = 15.309

= 15.625 x 2000 = 30,619.2

2000 se nai divide krain ge, and haan idr mri calculations mein garbr hai, soory  sbko total cost sai krni pari ge for proposed contract = 61237.24

Nadia ji thori c confusion hai, plz clear

15625/1020.6 =15.309

to phir ap ne 15.625*2000 kaise kiya hai?? i guess 15.309*2000 i rite??? plz clarify..

misssstypeee :p
sorrrry sai kehre ho ap

Thaank you mein ne apne solution mein b ye garbr ki v thi :p

also ap ki proposed project ki calculations mein garbar hai.... ordering cost 30618 & carrying cost 31249 hain....which will make total cost 61867......plz chk & confirm am i rite?? 

sunoo... total ordering cost, 30619 ari hai, total carrying cost 30618 ari hai, total 61237 na hva?

15625/1020.6 = 15.309

 = 15.309 x 2000 = 30,619

1020.6/2 = 510.3

 = 500 x 12% = 60

 = 510.3 x 60 = 30618

sai nai ye?

ji ji bilkul sae... now its perfect.. :) (Y) 

nadia plz gv correct and complete solution mjse sb garbar ho rha plz bht kum time reh gaya


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