Question 1
The annual demand for an item is 40,000 units. The cost to process an order is $40 and the annual inventory holding cost is $3 per item per year. What is the optimal order quantity, given the following price breaks for purchasing the item?
| Quantity | Price |
| 1-1,499 | $2.50 per unit |
| 1,500 - 4,999 | $2.30 per unit |
| 5,000 or more | $2.25 per unit |
a. What is the optimal behaviour?
b. Does the firm take advantage of the lowest price available? Explain.
Question 2
Groundz Coffee Shop uses 4 pounds of a specialty tea weekly; each pound costs $16. Carrying costs are $1 per pound per week because space is very scarce. It costs the firm $8 to prepare an order. Assume the basic EOQ model with no shortages applies. Assume 52 weeks per year, closed on Mondays.
a. How many pounds should Groundz order at a time?
b. What is total annual cost (excluding item cost) of managing this item on a cost-minimizing basis?
c. In pursuing lowest annual total cost, how many orders should Groundz place annually?
d. How many days will there be between orders (assume 310 operating days) if Groundz practices EOQ behaviour?
Ground coffee magnified
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