Based on Efroymson and Ray (1966). Stonecutters is a new bakery chain that sells bread to customers throughout the state of Indiana. Stonecutters is considering building bakeries in three locations: Evansville, Indianapolis, and South Bend. Each bakery can bake up to 900,000 loaves of bread each year. The cost of building a bakery at each site is $5 million in Evansville, $4 million in Indianapolis, and $4.5 million in South Bend. To simplify the problem, we assume that Stonecutters has only three customers. Their demands each year are 700,000 loaves (customer 1); 400,000 loaves (customer 2); and 300,000 loaves (customer 3). The total cost of baking and shipping a loaf of bread to a customer is given in the file P06_76.xlsx. Assume that future shipping and production costs are discounted at a rate of 12% per year. Assume that once built, a bakery lasts forever. How would you minimize the company’s total cost of meeting demand, present and future?
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