Question
A specialty coffee house sells Colombian coffee at a fairly steady rate of 25 kilos each month. The beans are purchased from a local supplier
A specialty coffee house sells Colombian coffee at a fairly steady rate of 25 kilos each month. The beans are purchased from a local supplier for $2.40 per kilo. The coffeehouse estimates that it costs $45 in paperwork and labor to place an order for the coffee, and holding costs rate 20% for one dollar of inventory kept for one year. a. Find the optimal order quantity and the optimal period of time (in months) between two consecutive replenishment orders. b. Suppose that the finance manager made a mistake and fixed ordering cost is in fact $15 instead of $45. Determine the error made in calculating the total annual cost as a result of using the wrong value. That is, compare the actual total annual cost with the optimal total annual cost that you would have if you knew that the fixed ordering cost is in fact $15.
Step by Step Solution
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Step: 1
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