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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 contractwith 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 ofearning 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 5

th

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 onboth 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 costcalculated above; calculate the 

total cost for both proposals. Also suggests the mostsuitable proposal for PTI on total cost basis. 

IMPORTANT: 

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