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In: Statistics and Probability

It costs a pharmaceutical company $75,000 to produce a 1,000-pound batch of a drug. The average...

It costs a pharmaceutical company $75,000 to produce a 1,000-pound batch of a drug. The average yield from a batch is unknown but the best case is 90% yield (that is, 900 pounds of good drug will be produced), the most likely case is 85% yield, and the worst case is 70% yield. The annual demand for the drug is unknown, with the best case being 20,000 pounds, the most likely case 17,500 pounds, and the worst case 10,000 pounds. The drug sells for $125 per pound and leftover amounts of the drug can be sold for $30 per pound. To maximize annual expected profit, how many batches of the drug should the company produce? You can assume that it will produce the batches only once, before demand for the drug is known.

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Expert Solution

Solution:

Given that,

Pharmaceutical company $75,000

produce a 1,000-pound batch of a drug

best case is 90% yield

worst case is 70% yield.

   best case being 20,000 pounds

worst case 10,000 pounds

orchestra answered 1 year ago
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