IEOR 150, Fall 2010 Homework 2 1. (Problem 4.17 in the textbook) The Wod Chemical Company produces a chemical compound that is used as a lawn fertilizer. The compound can be produced at a rate of 10,000 pounds per day. Annual demand for the compound is 0.6 million pounds per year. The ﬁxed cost of setting up for a production run of the chemical is $1,500, and the variable cost of production is $3.50 per pound. The company uses an interest rate of 22 percent to account for the cost of capital, and the costs of storage and handling of the chemical amount to 12 percent of the unit production cost. Assume that there are 250 working days in a year. Note. In fact we are also assuming these 250 working days are consecutive and demand does not occur during oﬀ days. In other words, we are assuming a year has only 250 days. (a) (5 points) What is the optimal size of the production run for this particular compound? (b) (5 points) What proportion of each production cycle consists of uptime and what proportion
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