Amy drinks 5 capsules of coffee every week (assuming 50 weeks in a year). Each capsule costs $1, and the delivery fee is $5 per order. The annual holding cost rate is 20%. The coffee manufacturer provides a special offer: the price of each capsule becomes $0.98 if the order quantity is at least 80 capsules. Amy, therefore, conducts the following analysis:STEP 1: The EOQ without the discount is around 112 units, and the corresponding minimum ordering + holding cost is $22.36.STEP 2: The ordering + holding cost with the quantity discount is K*R/80 + h_new*80/2 = $23.47.STEP 3: The additional ordering + holding cost to get the discount offer is $23.47 - $22.36 = $1.11.STEP 4: The additional saving in the purchasing cost is R*($1 - $0.98) = $5.According to Amy's analysis, she decides the quantity = 80 to obtain the discount, but the decision is not optimal. Please choose the earliest step that Amy makes a mistake. aStep 1 bStep 2 cStep 3 dStep 4

The price of each capsule will change to 0.98 only if the order quantity moves above 80. So there…

Answered: According to Amy's analysis, she…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

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Amy drinks 5 capsules of coffee every week (assuming 50 weeks in a year). Each capsule costs $1, and the delivery fee is $5 per order. The annual holding cost rate is 20%. The coffee manufacturer provides a special offer: the price of each capsule becomes $0.98 if the order quantity is at least 80 capsules. Amy, therefore, conducts the following analysis:

STEP 1: The EOQ without the discount is around 112 units, and the corresponding minimum ordering + holding cost is $22.36.
STEP 2: The ordering + holding cost with the quantity discount is K*R/80 + h_new*80/2 = $23.47.
STEP 3: The additional ordering + holding cost to get the discount offer is $23.47 - $22.36 = $1.11.
STEP 4: The additional saving in the purchasing cost is R*($1 - $0.98) = $5.

According to Amy's analysis, she decides the quantity = 80 to obtain the discount, but the decision is not optimal. Please choose the earliest step that Amy makes a mistake.