Reference no: EM132952599
ChemCo makes a (liquid) chemical compound, called IceSafe, that is used for making ice-melt, an anti-icer that can be spread on driveways and roads before wintry weather to prevent new ice from forming. Base21 is a key raw material needed to make IceSafe. In preparation for the upcoming winter, ChemCo must decide how much of Base21 to order. Since the supply lead time for Base21 is more than four months, ChemCo needs to order enough raw material in September to meet demand for IceSafe during the winter months. IceSafe demand depends on the weather, and so is uncertain. Based on past data and seasonal weather forecasts, ChemCo predicts that total demand this winter will follow a Normal distribution with a mean of 25,000 gallons, and a standard deviation of 12,500 gallons. ChemCo sells IceSafe for $25 per gallon.
For simplicity, assume that each gallon of IceSafe requires one gallon of Base21. ChemCo purchases Base21 for $7.50 per gallon, and also incurs a transportation cost of $0.50 per gallon for delivery to its production facility. ChemCo has adequate manufacturing capacity to produce IceSafe 'just-in-time' after receiving customers' orders, i.e., it does not produce and store IceSafe in advance of observing actual demand. The direct cost to produce IceSafe (excluding the cost of Base21) is $2 per gallon. Base21 deteriorates with time, and cannot be used after four or five months. If any Base21 material is leftover at the end of the winter season, government regulations require ChemCo to safely dispose off the remaining stock of Base21 at a cost of $5 per gallon.
ChemCo's Marketing manager wants to ensure that the likelihood of not being able to fully meet IceSafe demand this winter (due to lack of Base21) is no more than 8%.
Under this proposed policy:
How many gallons of Base21 should ChemCo purchase?
On average, what proportion of expected demand will ChemCo be able to satisfy?
What is ChemCo's expected profit?
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