Question

A gourmet coffee shop in downtown Oakland is open 200 days a year and sells an average of 75 pounds of Kona coffee beans a day. Demand can be assumed to be distributed normally with a standard deviation of 15 pounds per day. After ordering (fixed cost = $16/order), beans are always shipped from Hawaii within exactly 4 days. Per-pound annual holding costs for the beans are $4.6. What is the EOQ for Kona coffee beans?

Answer 1

EOQ for Kona coffee beans is 323 pounds

Step-by-step explanation:

Economic Order Quantity (EOQ) is calculated to determine the optimal order quantity for business in order minimise their costs such as warehousing, overstocking and logistics cost. It is calculated using the following formulae:

EOQ = √[(2(setup costs)(demand rate))] / holding costs

Where demand rate is the demand, a company receives for a product each year. In this case the shop opens 200 days a year and sells average 75 pounds of coffee beans a day. Which in total is 15,000 pounds of coffee beans in a year. This is the annual demand for Kona Coffee beans.

The Setup costs also referred to as the Order Cost, is the cost of order per purchase which includes the shipping and handling cost. This is given as $16/order.

Holding cost also referred to as the carrying cost, is the cost for holding the inventory. In the given question, the holding cost is $4.6 per pound.

EOQ = √{(2) (16) (15,000)} / 4.6

EOQ = 323 pounds