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A popular, local coffeeshop in one of the suburbs of New York City (NYC) estimates they use 3,500 pounds of coffee annually. They have to determine how many pounds to order each time in order to minimize their total annual cost. a. Determine the optimal size of the order assuming an EOQ model with a holding cost of $10 per pound annually and an ordering cost of $100. (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. The owner has recently opened another store of the same size in New York City; however, the demand for coffee is increased to 4,000 pounds annually, and the holding cost is $60 per pound. Those numbers are much higher as is the cost of real estate in NYC. The owner places orders of the same size as the first store because they are the same size stores. How much will the total cost be in the new coffeeshop

Sagot :

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a) The determination of the optimal size of the order assuming an EOQ model for the local coffee shop is 265 pounds.

b) The total cost in the new coffee shop where the demand for coffee increased to 4,000 pounds at an order size of 265 pounds per order (assuming a unit cost of $3 per pound) is $253,500.

What is the EOQ Model?

The economic order quantity (EOQ) model calculates the ideal order quantity a company should purchase to minimize inventory costs such as holding costs, shortage costs, and order costs.

It is determined using the following model:

EOQ = square root of: 2 (ordering costs)(demand rate) / holding costs.

Thus, the EOQ model can be worked out as follows:

  • Determine the demand units.
  • Determine the ordering cost.
  • Determine the holding cost.
  • Multiply the demand by 2.
  • Then multiply the result by the order cost.
  • Divide the result by the holding cost.

Data and Calculations:

a) The annual demand for coffee = 3,500 pounds

Holding cost per pound = $10

Ordering cost = $100

EOQ = square root of: 2 ($100 x 3,500) / $10

= 265 pounds

The annual demand for coffee = 4,000 pounds

Holding cost per pound = $60

Ordering cost = $100

EOQ (Order size) = 265 pounds

Assumed unit cost per pound = $3

The total cost in the new coffee shop = $

Annual holding cost = $240,000 ($60 x 4,000)

Annual ordering cost = $1,500 ($100 x 4,000/265)

Annual purchase cost = $12,000 (4,000 x $3)

Total costs = $253,500

Learn more about the economic order quantity at https://brainly.com/question/14625177

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