Question: Harold Gwynne is considering starting a sandwich-making business from his dormitory room in order to earn some extra income. However, he has only a limited budget of $100 to make his initial purchases. Harold divides his needs into three areas: breads, meats and cheeses, and condiments. He estimates that he will be able to use all the products he purchases before they spoil, so perishability is not a relevant issue. The demand and cost parameters are as follows.
Breads Meats and Cheese Condiments
Weekly Demand 6 packages 12 packages 2 pounds
Cost per unit $0.85 $3.50 $1.25
Fixed order cost $12 $8 $10
The choice of these fixed costs is based on the fact that these items are purchased at different locations in town. They include the cost of Harold's time in making the purchase. Assume that holding costs are based on an annual interest rate of 25 percent.
a. Find the optimal quantities that Harold should purchase of each type of product so that he does not exceed his budget.
b. If Harold could purchase all the items at the same location, would that alter your solution? Why?