Question

A specialty coffee house sells Colombian coffee at a steady rate of 3600 pounds annually. The beans are purchased from a local supplier for $5.33 per pound. The coffee house estimates that it costs them $120 in paperwork and labor to place an order for the coffee. Holding costs are based on a 20% annual rate.

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 3 months?


d. How about 6 months?

Answer 1

(a) As per the EOQ method, orders should be 4 per year but the contraint here is shelf life of the product. Hence, 12 orders have to be placed.

b) Quantity ordered=300 pounds

c) If a vacuum freezer can hold coffee upto 3 months, the company will be hitting EOQ. Their total cost will reduce from 5040 to 960. So, the difference, 4080 is the maximum amount which the company must be willing to pay.

d) If a freezer can hold the coffee for 6 months the total cost will come down to 1199 from 5040. SO the company cna pay a maximum of 3841 for the freezer.

EOQ model equation is attached