Problem 2 [25 pts] 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 year-long 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. In addition, PBK managers figure their cost of capital is approximately 2 percent per month. (a) What is the optimal order size, in bags? [5 pts] (b) Given your answer in (a), how many times a year does PBK

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 year-long 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. In addition, PBK managers figure their cost of capital is approximately 2 percent per month. (a) What is the optimal order size, in bags? [5 pts] (b) Given your answer in (a), how many times a year does PBK place orders? [5 pts] (c) On average, how many dollars per month does PBK spend to hold coffee (including cost of capital)? [5 pts] 3 ISOM2700: Homework Assignment \#3 Suppose that a South American import/export company has offered PBK a 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 $2,000. 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. (d) Should PBK order from Phish Roasters or the South American import/export company? Quantitatively justify your answer. [10 pts]