The 3D bio-printing has been developed as an effective approach to artificially create tubular tissue structures, which have been frequently found in body and organ systems. China Agricultural University (CAU) has developed a laboratory 3D bio-printer that can create tubular structures with the encapsulation of microfluidic channel. In order to create a tubular structure with more effective micro-channel encapsulation for better nutrient delivery and chemical stimulation, this work presents a design optimization of co-axial dispensing nozzle of this 3D bio-printer. In this study, an experimentally validated two-phase flow computational fluid dynamics modeling tool based on ANSYS CFX has been developed to analyze the microfluidic domain of fluid channels inside the nozzle. The simulations on the extrusion and encapsulation process of bio-inks have been conducted. Based on the response surface method, the simulation work has established an equation to predict the volume fraction of the encapsulating layer against a variety of influencing factors including the size of extrusion nozzle, pneumatic pressure condition and the dynamic viscosity of the bio-ink. This equation has been used to recommend optimal solutions of printing parameters for the CAU bio-printer, which is expected to improve the quality of bio-printed tubular structure with an encapsulation.