Powered by Koffee (PBK) is a new on-campus coffee shop. PBK uses 40 bags of whole bean coffee every month, and their demand is perfectly steady and stable throughout the year. PBK has signed a one-year contract to purchase its coffee from a local supplier, Phish Roasters, for a price of $25 per bag. There’s a $75 fixed cost for each delivery independent of ordering size. The holding cost due to storage is $1.50 per bag per month (Note: this is equal to the holding rate multiplied by the cost per bag, or kC).
A) What is the optimal order size (EOQ), in bags?
B) PBK is thinking about buying their coffee directly from a South American exporter for a price of $20 per bag and fixed cost for delivery of $500. Assuming the holding cost is the same ($1.50 per bag per month), should PBK switch to the South American exporter? Why or why not?