Problem 1:

A specialty coffee house sells Colombian coffee at a steady rate of 6,000 pounds annually. The beans are purchased from a local supplier for $3.00 per pound. The coffee house estimates that it costs them $75 in paperwork and labor to place an order for the coffee. Holding costs are based on a 30% annual rate.

a. Determine the optimal order quantity for coffee;

b. What is the time between placement of orders?

c. What is the average annual inventory holding cost?

d. What is the average annual ordering cost?

Problem 2:

Suppose the coffee from the above problem has a shelf life of 1 month.

a. How often should orders be placed?

b. What quantity should be ordered?

c. How much would this coffee house be willing to pay for a vacuum freezer that would store the coffee for up to 2 months?

d. How about 4 months?

Problem 3:

A local machine shop buys hex nuts and molly screws from the same supplier. The hex nuts cost $.50 each and the molly screws cost $1.50 each. An ordering cost of $75 is assumed for all orders. Holding costs are based on a 30% annual rate. The shop uses an average of 30,000 hex nuts and 22,500 molly screws annually.

a. What is the optimal order size for each of the 2 items?

b. What is the time between orders for each of the 2 items?