Reference no: EM131283558

A large hotel serves banquets and several restaurants from a central kitchen in which labor is shifted among various stations and jobs. Dessert consumption is virtually constant and known to be 40,000 desserts a year. Desserts can be produced at a rate of 150 a day, and the hotel is open 365 days a year. It costs $5.00 to set up the dessert preparation station, regardless of how many deserts are then prepared, and each dessert costs $0.50. The appropriate annual holding cost of a dessert is estimated at 300% of the cost of the dessert, due to the risk of spoilage. Unfortunately, the refrigerated pantry that the kitchen uses to store desserts will only store a maximum of 350 desserts, so the kitchen always makes a batch of 350 desserts every time it needs new desserts.

A. How much does the hotel central kitchen pay in total annual holding and ordering costs on dessert? How often does it produce desserts under its current policy?

B. What is the order size, or run size, that would minimize the total annual cost of desserts? How much savings could be achieved by using this order size?

C. By how much would the central kitchen have to expand the capacity of the refrigerated panty that stores desserts, to implement the lowest cost policy?