University of California, Los Angeles - MGMT 4102018 Flex FEMBA 410 Assignment 04 Key

Question 1 A specialty coffee house sells Jamaican Blue Mountain Coffee at a fairly steady rate of 280 pounds annually. The beans are purchased from a local supplier for $2.40 per pound. The coffee house estimates that it costs $45 in paperwork and labor to place an order for the coffee and that holding costs are based on a 20% annual interest rate. D = 280 lb/yr C = $2.40 S= $45i = 0.2 Holding cost: H = iC = 0.2 x $2.40 = 0.48 $/lb (a) Determine the optimal order quantity for Jamaican Blue Mountain Coffee. Economic Order Quantity: 229.13 230 0.48 2 2 45 280 *       H SD Q (b) What is the time between placement of orders? Time between order placements: yrs days QD T 0.818 298.7 280 * 230     (c) What is the average annual cost of holding and setup due to this item? Average annual holding cost, H’ : $55.2 2 230 0.48 2 * H' H Q   Average Annual Setup Cost, S’ : $54.78 230 45 280 * '    Q SD S Total Average Cost = H’’+ S’’= $109.98 Or, we could directly use the formula for average cost of the optimal policy: C(Q*) = (2S.D.H)½ = (2 x 45 x 280 x 0.48)1/2 = $109.98