Powered by Coffee (PBK) is a new campus coffee store. PBK uses 50 bags of whole bean coffee every month, and you may assume that demand is perfectly steady throughout the year. PBK has signed a year-long contract to purchase its coffee from a local supplier, Phish Roasters, for a price of $25 per bag and an $85 fixed cost for every delivery independent of the order size. The holding cost due to storage is $1 per bag per month, PBK managers figure their cost of capital is approximately 2 percent per month.
On average, how many dollars per month does PBK spend to hold coffee (including cost of capital )?
Suppose that a South American import/export company has offered PBK a dead for the next year. PBK can buy a years worth of coffee directly from South America for $20 per bag and a fixed cost for delivery of $500. Assume the estimated cost for inspection and storage is $1 per bag per month and the cost of capital is approximately 2 percent per month.
Should PBK order from Phish Roaster or the South American import/export company ? Quantitatively justify the answer.