Lee Industrial Pte Ltd, which

Lee Industrial Pte Ltd, which is referred to as LIP in the following, develops industrial chemicals
to supply other local manufacturers. G20, one of LIP’s products, is used by several companies to
produce detergent products. To produce G20 efficiently, LIP uses the batch approach, in which a
batch that is an integer multiple of a fixed lot size is produced at one time. This reduces setup costs
and allows LIP to produce G20 at a competitive price. Unfortunately, G20 has a very short shelf
life of only about one month.
LIP sets the fixed lot size to be 1,000 kilograms and produces in batches of either 1 (one) lot or 2
(two) lots each time. Using historical data, it was determined that the probabilities of selling 1 lot
and 2 lots next month are 0.6 and 0.4, respectively. The question facing LIP now is how many lots
to produce in the next month batch run. G20 sells for $17.00 per kilogram. Manufacturing cost is
$12.00 per kilogram, and handling costs and warehousing costs are estimated to be $1.00 per
kilogram. If G20 is not sold at the end of the month, the chemical loses much of its important
properties. It can, however, be sold at a salvage value of $10.00 per kilogram. Furthermore, LIP
has guaranteed to its customers that there will always be an adequate supply of G20. In case of a
stock-out, a comparable chemical has to be purchased from a competitor at $22.00 per kilogram,
and sold to the customer at the regular price of $17.00 per kilogram. Therefore, a shortage means
that LIP loses $5.00 per kilogram to buy the more expensive chemical.
(a) Develop a profit or payoff table for the decision problem. What is the best size (i.e., 1 lot
or 2 lots) for LIP in the next month batch run? What is the expected profit under the best
(b) Determine the expected value of perfect information for this problem.
(c) To obtain more accurate demand information, LIP may hire Hasidah Yatch to conduct a
market research. Hasidah is a well-known industrial analyst in the region. Past data show
that she is able to predict the market demand with an accuracy of 90%. If Hasidah charges
a consultation fee of $1,500, is it worthwhile for

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