So In the previous video we were thinking if 100 is our magic number , well Wilson thought the same few years back and he came up with formula saying if you want to find out magic number i.e what quantity you need to order ? then simply , substitute given data into the formula will result into magic number !! so the formula is under the root 2 into A B divided by C in that A is Annual Req of Raw material *IN UNITS* The requirement of raw materials needed not in rupees in units , B Ordering cost *PER ORDER* I.e cost of placing every order. Point to remember ” A=Annual ” (yearly) and not Quarterly or monthly . Annual Req of Raw material in *UNITS* B=Ordering cost *PER ORDER* C=Carrying Cost (per unit ) p.a Look I m Highlighting (pink highlights) to make you all focus on Highlighting because the examiner in your exam will tell you monthly requirement of raw materials is XXX Ordering cost =XXX, Carrying Cost=XXX and you will think you got A , B , C ; but it’s wrong As A=*ANNUAL REQUIREMENT * if monthly is given we”ll multiply by 12 if Quarterly given than will do accordingly, similarly if carrying cost is not given as per unit , p.a we will convert it into per unit and p.a Now we recall our example , in our example 2500 is our output we need to get we also know that ratio was 2:1 means if input is 5000 (raw material) raw material 5000 then only our output of 2500 will be possible secondly we also know that the price of raw material is Rs.10 ….. But do we need rs.50,000/- ?????????? means we need 5,000*10 ??? ….. *NO* what i need Annual Req of Raw material in *UNITS* So We got *A* Right ? YES ! Let’s See Under the root 2 into *A*=5,000 (Annual Req of Raw material in *UNITS*) *B* Ordering Cost Per order is 16/- & *C* Carrying Cost per unit p.a is given in Question is 4/- because this are constant , fixed and know from the begining of the year if i calculate this ….. 2*5000*16/4=40,000 now root =200 So my MAGIC Quantity is 200 UNITS .. means i don’t have to order at 100 units everytime nor 500 units at a time that already discussed earlier . so ideally i should order 200 -200 units of raw materials that satisfy my annual requirement of 5,000 units that is to be order ! Now this 200 units are correct OR incorrect let’s test it in our next video !!!!