Chapter 12, Problem 49P

A gourmet coffee shop in downtown San Francisco 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 per order), beans are always shipped from Hawaii within exactly 4 days. Per-pound annual holding costs for the beans are $3.

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?

c) What are the total annual ordering costs for Kona coffee beans?

d) Assume that management has specified that no more than a 1% risk during stockout is acceptable. What should the reorder point (ROP) be?

e) What is the safety stock needed to attain a 1% risk of stockout during lead time?

f) What is the annual holding cost of maintaining the level of safety stock needed to support a 1% risk?

g) If management specified that a 2% risk of stockout during lead time would be acceptable, would the safety stock holding costs decrease or increase?