Reviewed the operations of the business carefully

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Reference no: EM131074595

You have recently acquired a franchise for Dunkin’ Donuts. You have reviewed the operations of the business carefully, from marketing to management, from accounting to finance. You have noticed that the store manager does not have a proper inventory policy. You want to optimize the amount of coffee that you should order at one time. The price of coffee is $4.50 per lb and it comes in 25-lb bags. The price per bag is 4.5*25 = $112.50. The store uses 3000 lb of coffee every year, that is, 3000/25 = 120 bags. The coffee is stored in a back room, where other supplies are also stored. You have found that the storage cost of coffee per year, based on average inventory is $1.25 per lb per year. Or, it is 1.25*25 = $31.25 per bag per year. The cost of capital for this business is 15% per year. The ordering cost of coffee is $35 per order. From finance, you have learned that you should find the present value of all the payments you have made to (1) order, (2) purchase, and to (3) store the coffee. Of course, you need not include the financing cost because it is included in the present value calculations. You can find the optimal solution by minimizing the PV of the total cost.

Reference no: EM131074595

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