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).