Question

The expected annual demand for the newly approved drug Prisdol is 50,000, but there is a lot of uncertainty. A plant to produce the drug will be built at a cost of $16 per unit of capacity, which is a one-time expense. In addition, there is an annual maintenance cost of $0.40 per unit of capacity. The production cost per unit is $0.20. The drug’s selling price will be $3.70/unit. Suppose that Z denotes the random demand for the drug in a year, and suppose that a plant is built with an annual capacity of 45,000. No inventory will be built up; the company will produce only what is needed for demand in a year, and no more than capacity. Select the least accurate statement regarding elements of a model for this setting.

1 The cost to build the plant is 45,000 * $16.
2 The annual maintenance cost is 45,000 * $0.40.
3 The sales revenue in a year is Z * $3.70
4 The unsatisfied demand in a year is max(Z – 45,000, 0).

Answer 1

The least accurate statement regarding elements of a model for this setting is:

4 The unsatisfied demand in a year is max(Z – 45,000, 0).

Explanation:

Expected annual demand for Prisdol = 50,000

Annual Plant Capacity = 45,000 units of drugs

Cost of building the plant = 45,000 * $16

Annual maintenance cost = 45,000 * $0.40

Production cost per unit = $0.20

Selling price per unit = $3.70

Sales revenue in a year = Z * $3.70,

where Z denotes the random demand in a year

b) Statements 1, 2, and 3 are accurate in this model setting. However, statement 4 sets up a model that does not concur with the setting. The unsatisfied demand in a year should be Z minus 45,000 if the plant produced full capacity. Otherwise, it is Z minus annual production units.