David sells all the chemical at 20 per gallon so his


Coren Chemical, Inc. develops industrial chemicals that are used by other manufacturers to produce photographic chemicals, preservatives, and lubricants. One of their products, K-1000, is used by several photographic companies to make a chemical that is used in the film-development process. To produce K-1000 efficiently, Coren Chemical uses the batch approach, in which a certain number of gallons are produced at one time. This reduces setup costs and allows Coren Chemical to produce K-1000 at a competitive price. Unfortunately, K-1000 has a very short shelf life of about one month.

Coren Chemical produces K-1000 in batches of 500 gallons, 1000 gallons, 1500 gallons, and 2000 gallons. Using historical data, David Coren was able to determine that the probability of selling 500 gallons of K-1000 is .2. The probabilities of selling 1000, 1500, and 2000 are .3, .4, .1, respectively. The question facing David is how many gallons to produce of K-1000 in the next batch run. K-1000 sells for $20 per gallon.

Manufacturing costs is $12 per gallon, and handling costs and warehousing costs are estimated to be $1 per gallon. In the past, David has allocated advertising costs to K-1000 at $3 per gallon. If K-1000 is not sold after the batch run, the chemical loses much of its important properties as a developer. It can, however, be sold at salvage value of $13 per gallon. Furthermore, David has guaranteed to his suppliers that there will always be an adequate supply of K-1000. If David does run out, he has agreed to purchase a comparable chemical from a competitor at $25 per gallon. David sells all the chemical at $20 per gallon, so his shortage means that David loses the $5 to buy the more expensive chemical.

a) Develop a decision tree of this problem

 

Request for Solution File

Ask an Expert for Answer!!
Operation Management: David sells all the chemical at 20 per gallon so his
Reference No:- TGS0588430

Expected delivery within 24 Hours