Question: Consider the coffeehouse discussed in given Problem. Suppose that its setup cost for ordering was really only $15. Determine the error made in calculating the annual cost of holding and setup incurred as a result of its using the wrong value of K. (Note that this implies that its current order policy is suboptimal.)

Problem: 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 coffeehouse 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.

a. Determine the optimal order quantity for Colombian coffee.

b. What is the time between placement of orders?

c. What is the average annual cost of holding and setup due to this item?

d. If replenishment lead time is three weeks, determine the reorder level based on the on-hand inventory.