Groundz Coffee Shop uses 4 pounds of a specialty tea weekly; each pound costs $16. Carrying costs are $1 per pound per week because space is very scarce. It costs the firm $8 to prepare an order. Assume Groundz is open 52 weeks per year, and closed on Mondays.

a. (5 points) How many pounds should Groundz order at a time?

b. (10 points) What is the total annual cost of managing this item?

c. (7 points) The lead time for orders to arrive is 1.5 (work) weeks. If the standard deviation of weekly demand is 1.2 pounds, and Groundz wishes to achieve at least a 98% customer satisfaction level, what is the reorder point?

d. (10 points) Groundz has been contacted by a new supplier who is offering to sell the same tea for $12 per pound. In return, Groundz can place orders only once a month. Inventory and ordering costs would remain the same. Is it more cost-effective for Groundz to switch suppliers? Should Groundz switch?

Midterm 2 Page 5 DS 412 College of Business, SFSU Fall 2005 Theresa M. Roeder

9. (30 points) A high school student is trying to decide what to do after high school. She could get a job, where she expects to make an average of $25,000 per year over the next 10 years. She assumes she will have no problems finding a job. She can attend an Ivy League school, which will cost $30,000/year for 4 years if she gets a degree in the liberal arts or business. If she decides to major in engineering, she concludes (perhaps incorrectly) that her studies will be much more stressful, and that she should assign an extra $10,000/year in costs. There is a 50% chance that she will get into an Ivy League school. If she does not, she can either get a job immediately, or go to a local state school. If she gets an Ivy League degree, she anticipates an average salary of $60,000/year if she does not get an engineering degree, or $80,000/year if she does. There is an 80% chance she will get such a job after she graduates. If not, she can find the type of job she would have gotten had she not gone to college. If she attends a state school, her costs will be $10,000/year for liberal arts/business and $15,000/year for engineering. She assumes there is a 95% chance she will be accepted at a state school, and a 75% chance she will be able to find a position after graduating. She anticipates average salaries of $50,000/year and $65,000/year, depending on her major. Assume there are no time value of money concerns. Draw the decision tree and make recommendations on which decisions are the most appropriate.