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##### Coren Chemical, Inc., develops industrial chemicals

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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-developing process. To produce;K-1000 efficiently, Coren Chemical uses the batch;approach, in which a certain number of gallons is;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, 1,000 gallons, 1,500 gallons, and;2,000 gallons. Using historical data, David Coren;was able to determine that the probability of selling;500 gallons of K-1000 is 0.2. The probabilities of;selling 1,000, 1,500, and 2,000 gallons are 0.3, 0.4;and 0.1, respectively. The question facing David ishow many gallons to produce of K-1000 in the next;batch run. K-1000 sells for \$20 per gallon. Manufacturing;cost 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 a 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 of 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.;(b) What is the best solution?;(c) Determine the expected value of perfect information.

Paper#15178 | Written in 18-Jul-2015

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