Powered by Koffee (PBK) is a new campus coffee store. PBK uses 50 bags of whole bean coffee every month, and you may assume that demand is perfectly steady throughout the year. PBK has signed a year-long contract to purchase its coffee from a local supplier, Phish Roasters, for a price of $25 per bag and an $85 fixed cost for every delivery independent of the order size. The holding cost due to storage is $1 per bag per month. PBK managers figure their cost of capital is approximately 2 percent per month.
a. What is the optimal order size, in bags?
b. Given your answer in (a), how many times a year does PBK place orders?
c. Given your answer in (a), how many months of supply of coffee does PBK have on average?
d. On average, how many dollars per month does PBK spend to hold coffee (including cost of capital)? Suppose that a South American import/export company has offered PBK a deal for the next year. PBK can buy a years' worth of coffee directly from South America for $20 per bag and a fixed cost for delivery of $500. Assume the estimated cost for inspection and storage is $1 per bag per month and the cost of capital is approximately 2 percent per month.
e. Should PBK order from Phish Roasters or the South American import/export company? Quantitatively justify your answer.