Powered by Koffee (PBK) is a new campus coffee store. PBK uses 50 bags of whole
ID: 366981 • Letter: P
Question
Powered by Koffee (PBK) is a new campus coffee store. PBK uses 50 bags of whole bean coffee every month, and you may assume that demand is perfectly steady throughout the year PBK has signed a yearlong contract to purchase its coffee from a local supplier, Phish Roasters, for a price of 25$ per bag and an $85 fixed cost for every delivery independent of the order size The holding cost due to storage is $1 per bag per month. PBK managers figure their cost of capital is approximately 2% per month. a) Given that at the moment PBK orders each time quantity equal to 50 bags, are they ordering the amount that minimizes the total costs? b) If in a) you answered no, then what is the optimal order size, in bags? c) Given your answer in (a), how many times a year PBK place orders? d) Given your answer in (a), how many months of supply of coffee does PBK have on average? (Hint: Use Little's law) e) On average, how many dollars per month does PBK spend to hold coffee (including cost of capital)? Suppose that a South American import/export company has offered PBKa deal for the next year. PBK can buy a years' worth of coffee directly from South America for $20 per bag and a fixed cost for delivery of $500. Assume the estimated cost for inspection and storage is $1 per bag per month and the cost of capital is approximately 2 percent per month. Should PBK order from Phish Roasters or the South American import/export company? Quantitatively justify your answerExplanation / Answer
First we need to know what is the optimal order quantity
Holding cost = cost of capital * unit cost + storage cost
= 0.02 * 25 + 1 = 1.5
Optimal order quantity = Sqrt (2 * 85 * 50)/ 1.5
EOQ = 75.27 bags
Average inventory is half the order qty, hence order size = 75.27/ 2 = 37.6 bags
Since monthly demand is 50 bags, the average inventory supply can be calculated as - 37.6/ 50 = 0.753 months
Therefore, on an average PBK has 0.753 months of inventory.
e) Cost of holding one bag for one month = $1 of storage plus $20 * 2% = $0.40 cost of capital
Since the average inventory is 37.63 bags, the monthly total holding cost is calculated as -
37.63 * ($1 + $0.40) = $52.68 per month
Total cost of PHR per yr - Total cost of SA per year = $2212.69
Therefore, PBK should switch to SA coffee supplier as the cost per year is $2,212.69 which is less than PHR.
Flow Rate (R) Cost of capital Unit cost Setup cost (K) Holding cost (h) EOQ (Q*) Price+S/H Orders per year Total cost per year PHR 50 0.02 25 85 1.5 75.27 $2079.8 8 $16,638.78 SA 50 0.02 25 500 1.4 188.98 $4544.2 3 $14,426.09Related Questions
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