Question

(8 points) A coffee shop sells bags of roasted coffee beans to customers to make into coffee at home. The demand for these bags is quite predictable (and can be treated as deterministic for our purposes). The shop sells 3,500 bags of coffee beans per year. Each time the shop places an order for these bags with its coffee supplier, it incurs an administrative cost of $15, independent of the quantity ordered. The company values each bag at $12.50 (this is the book value, not the selling price), and the company’s inventory carrying rate is 15% per year. For all but Part 1f, assume that the lead time is zero, i.e., orders are received immediately when they are placed.

(a)Later you will determine the optimal order quantity, but for this question suppose that the coffee shop has chosen an order quantity of 200 units. With this order quantity, how long will each order cycle last, i.e., how much time will pass between orders? Be sure to specify in what units of time you are giving your answer.

(b)Calculate and report the economic order quantity (EOQ).

(c) What is the total annual cost if the coffee shop uses the EOQ that you just calculated? You can do this “manually” by plugging the EOQ into the total cost formula, or you can use the pre-simplified formula for the EOQ total cost given in the slides. Both methods should give the same answer.

(d) What is the average cost per unit demanded if the coffee shop uses the EOQ?

(e) Hypothetically, if the demand per year increased to 4,000 bags, would you expect the average cost per unit demanded to increase, decrease, or stay the same?

(f) (2 points) For this question, assume that there is a delay of 3 weeks between when the coffee shop submits an order and when they receive it. What inventory level should the coffee shop use as its reorder point?
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OPRE 4330 HW 5: Inventory Management

Answer 1