Name: Abhilash Bollam Session time: 4:30 PM

Q1 – Coffee house (Q2 on next page)

Homework: Goosehouse Coffee

• A specialty coffeehouse sells Colombian coffee at a fairly steady rate
of 280 pounds annually. The beans are purchased from a local
supplier for $2.40 per pound. The coffee house estimates that it
costs $45 in paperwork and labor to place an order for the coffee,
and holding costs are based on a 20 percent annual interest rate.

MGMT660
Introduction to Operations Management
• Use EOQ model

• The optimal order quantity isD= 280, S=45, H = 2.4*20%

Q= 229
• The time between placement of orders is
298.5 Days
• The annual cost of holding is
229/2*2.4*20% = 54.96
• The annual cost of ordering (not including the purchase cost) is

280/229*45 = 55.02

Homework: Goosehouse Coffee

• Suppose our estimate of R and H in the coffee house problem are correct
but the correct value of K is twice what we think it is. (It really is $90 per
order.)
• If we use Q = 229 our actual costs will be:
MGMT660
Introduction to Operations Management

Annual holding cost = 54.96

Annual ordering cost = 55.02*2= 110.04 (took k = 90)
Total = 165
• Using the correct K (= $90), we would adjust our EOQ value to:
Correct EOQ is 324
Annual holding cost is 77.76
Annual ordering cost is
77.77
Total = 155.55

Is the solution robust? Yes, the solution is robust

Q2 – Beer Distribution

Practice (Beer Distribution)

A beer distributor finds that it sells on average 100 cases a week of regular 12-
oz. Budweiser. For this problem assume that demand occurs at a constant rate
over a 50-week year. The distributor currently purchases beer at a cost of $8
per case. The inventory-related holding cost (capital, insurance, etc.) for the
distributor equals 25 percent of the dollar value of inventory per year. Each

MGMT660 Introduction to Operations

Management
order placed with the supplier costs the distributor $10. This cost includes
labor, forms, postage, and so forth.

a) What is the optimal order quantity? Q = Assuming per annum =707

if we consider per week = 223
b) What is the order cycle time? 7.07 weeks
if we consider per week = 2.23 weeks
c) How many orders does the distributor place every year? 7.07 orders
per week = 22.42 orders
d) What are the total inventory costs per week? Type your text
per week = 8.94
[Hint: for part a)-d), use EOQ model. Note that the holding cost rate is 20% per
year, you need to convert that to percentage per week.]

Total inventory cost = TC = PC + OC + HC, where TC is the Total Cost;

PC is Purchase Cost; OC is Ordering Cost; and
HC is Holding Cost.
all in per week = 100*10/707+707/2*0.04 = 15.55 per week
(dint consider purchasing cost
as mentioned in 1st question)