Question

A gourmet coffee shop in downtown San Francisco is open 200 days a year and sells an average of 77 pounds of Kona coffee beans a day.​ (Demand can be assumed to be distributed normally with a standard deviation of 14 pounds per​ day). After ordering​ (fixed cost​ = ​$14 per​ order), beans are always delivered from Hawaii in exactly 4 days.​ Per-pound annual holding costs for the beans are ​$2.

a) What is the economic order quantity? (EOQ) for Kona coffee beans?b) What are the total annual holding costs of stock for Kona coffee beans?

Answer 1

a. 464 beans

b. $464

Step-by-step explanation:

a. The computation of the economic order quantity is shown below:

=
`\sqrt{\frac{2* \text{Annual demand}* \text{Ordering cost}}{\text{Carrying cost}}}`

where,

Annual demand = 200 days × 77 pounds = 15,400

And, all other items values would remain the same

Now put these values to the above formula

So, the value would equal to

=
`\sqrt{\frac{2* \text{15,400}* \text{\$14}}{\text{\$2}}}`

= 464 beans

The average inventory would equal to

= Economic order quantity ÷ 2

= 464 units ÷ 2

= 232 units

b. Holding cost = average inventory × carrying cost per unit

= 232 units × $2

= $464