# A gourmet coffee shop in downtown SF is open 200 days a year and sel

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A gourmet coffee shop in downtown SF 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/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?
(400) b) What are the total annual holding costs of cycle
stock for Kona coffee beans? (\$600) c) What are the total
annual fixed ordering costs for Kona coffee beans? (\$600)
d) Assume that management has specified that no more
than a 1% risk during stock out is acceptable. What should
our reorder point (ROP) be? (369.79) e) What is the safety
stock need to attain a 1% risk of stock-out during lead
time? (69.79) 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
stock-out during lead time would be acceptable, would our
safety stock holding costs decrease or increase?
Solution
a. What is the economic order quantity (EOQ) for Kona
coffee beans? (400)
economic order quantity (EOQ) = sqrt(2DS/H) =
sqrt(2*200*75*16/3)= 400 pounds
b. What are the total annual holding costs of cycle stock

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A gourmet coffee shop in downtown SF 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/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? (400) b) What are the total annual holding costs of cycle stock for Kona coffee beans? (\$600) c) What are the total annual fixed ordering costs for Kona co ...
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