Gourmet Coffee (GC) is a specialty coffee shop that sells roasted coffee beans. It buys green beans, roasts them in its shop, and then sells them to the consumer. GC estimates that it sells about 150,000 pounds of coffee per year. Green beans cost about $ 1.50 per pound. In addition, there is a shipping charge that GCpays its supplier according to the following schedule:

GC estimates its cost of inventory at 15% per year. The administrative cost of placing an order (fax/ phone/ billing) and receiving the goods and so on is about $ 50 per order. In addition, to receive a shipment into its shop, GC rents a forklift truck for $ 350.
a. What is the optimal order quantity of beans for GC? What is the total annual cost?
b. GC is considering buying a forklift and building a ramp that will allow it to eliminate the rental cost of a forklift. GC will have to borrow money to finance this investment. If the life of the equipment is approximately five years, how much money should GC be willing to spend to buy a forklift and build a ramp? If the investment were made, what should be the optimal order policy for GC?

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Quantity Shipped Less than 10,000 pounds Less than 15,000 pounds More than 15,000 pounds Shipping Cost per Pound $0.17 $0.15 $0.13