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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

little correction in calculation...sorry for mis typing..

TOC of previous contract is 56,000 which will make Total Cost 111,905 & per unit cost 50.  

thank you.

thanx u bro k aap k data ki waja se mene assignment bana li ha, mujhe accounting sirray se nahi aati


required unit previous mein 12500 or current mein 15625 lena hy ya phr 62500 or current mein 78125 lena hy??????????????????????plz bta dain mjy bs yahein sy confusion ho raha hy

Ozair Akram 12,500 & 15,625 wo just 1yr k required units hain jab k hamein poore proposal ki calculations leni hain jo k 5yrs ka hai.. so hum previous mein 62500 & current mein 78125 len ge........

Thanks a lot 


app ka idea maybe wrong hay coz app nay to annual requirement ke value ko he change kar deya hay. jub kay "Order cost aur carrying cost" hum per year kay hessab se lay rahay han. 2nd ager iss pattern par bhe chala jay tub bhe app ke calculation may bhot mistakes han.

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

Required Units per 5yrs

Ordering Cost for One Order

Carrying Costs

Previous Contract


12,500*5=62500 units



Proposed Contract


62500*25%=62500+15625=78125 units



Moving on , 

EOQ = [(2xRUxOC)/(UCxCC%)]^1/2

Total Ordering Cost= Number of Orders * Cost Per Order

where number of orders = required units / EOQ

Total Carrying Cost    = Average Ordering Quantity * Carrying Cost per Unit

where Average Ordering Quantity = Ordering Quantity / 2 

and Carrying Cost per Unit = Unit Cost * CC% 

Total Cost = Total Ordering Cost x Total Carrying Cost

Per Unit Cost = Total Cost/Order Quantity 

 final calculations: 



Total Ordering Cost

Total Carry Cost

Total Cost

Per Unit Cost

Previous Contract






Proposed Contract









so previous proposal is suitable for PTI.

now thats what i understood of the assignment...and i'm also submitting the ALLAH knws better  good luck to everyone.. thank you 


here the calculations for more help 

previous proposal 

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

TOC = 28 * 2,000 = 56,000      (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 = 56,000 + 55,905 = 111,905

per unit cost = 111,905/2,236.1=50

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...

brother aap naey bht complicated kar diya kaam

i mean once u calculate the total cost for one year and then add it 4 times to calculate total cost for 5 years.

hmm i dont think so kuch bhi complicate hua hai...just required units change hue hain...baqi calculations to waise e ki hain... bas 12500 & 15625 ki jaga 62500 & 78125 ker diya hai...simple 


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