Test: Business Arithmetic - 1 - CUET Commerce MCQ

Economic order quantity (EOQ) is the order size which minimizes total annual inventory holding cost and cost of ordering. EOQ applies only when demand for a product is constant over the year and each new order is delivered in full when inventory reaches zero. There is a fixed cost for each order placed, regardless of the number of units ordered. There is also a cost for each unit held in storage, sometimes expressed as a percentage of the purchase cost of the item.

HIFO is not a technique used for inventory control. HIFO is a method of valuing cost price of inventory or stock. Under this method, the material received at the highest price is issued first. This method is good when it is desired to keep the inventory value of the materials at the lowest possible price.

Material requirements planning (MRP) is a production planning, scheduling, and inventory control system used to manage manufacturing processes. Most MRP systems are software-based, but it is possible to conduct MRP by hand as well.

The formula for EOQ = ;
where F = fixed cost per order; D = Units demand per year; C = Cost per unit per year;
Now suppose F = 1000
C = 20
D = 10000
Therefore as per the formula EOQ = 1000.
Now when the demand is estimated to be doubled in the next year with other things constant, it is calculated as, D = 20000.
Now as per the formula EOQ = 1414.

Net Working Capital Ratio is measured by the following formula:
Net Working Capital/Net Working Assets
This is the only tool to measure a company's liquidity position.

Working capital, also known as net working capital (NWC), is the difference between a company's current assets, such as cash, accounts receivable (customers' unpaid bills) and inventories of raw materials and finished goods, and its current liabilities, such as accounts payable. So, tools, machines and building are fixed capital. Raw material is working capital.

Return on investment (ROl) is equal to Net Profit After Tax/Tangible Net Worth. ROI is a financial ratio intended to measure the benefit obtained from an investment.

Let 'a' be the first year's return and 'd' be the common difference by how much returns are increasing.
According to question,
Return in the 5^th year = Rs. 16,000
so, a + (n – 1)d = a_n
a + (5 – 1)d = 16,000
a + 4d = 16,000 --- (i)
Return in the 13^th year = Rs. 28,000
So, a + (n – 1)d = a_n
a + (13 – 1)d = 28,000
a + 12d = 28,000 --- (ii)
Now, subtract equation (i) from equation (ii).
8d = 12,000
Therefore, d = 12000/8
d = 1,500
This means each year returns are increasing by Rs. 1,500.
Substitute the value of 'd' in equation (i).
a + 4(1,500) = 16,000
a + 6,000 = 16,000
a = 16,000 – 6,000
a = 10,000
So, the return in the first year was Rs. 10,000.

Return on equity measures the profitability of equity funds invested. It measures how profitably owners' funds have been utilised.
Net profit after tax = Net profit before tax - Tax
= 60,000 - (20% of 60,000) = Rs. 48,000
Preference dividend = 1,00,000 x 12% = Rs. 12,000
ROE = ((Net profit after tax - Preference dividend) x 100}/Shareholder's funds
ROE = {(48,000 - 12,000) x 100}/2,00,000
= {36,000 x 100}/2,00,000
= 18%

Return on equity will be 40%. This is calculated as follows:Net profit after tax × 100/equityEquity = 16,00,000 + 4,00,000 = Rs. 20,00,000Thus, return on equity = 8,00,000 × 100/20,00,000 = 40%.