How does the presence of fixed charge affect the modeling of production problem?
Fixed charge destroys proportionality assumption, which is a key to linear programming models. When there are fixed charge, one can resort to using logical upper bound technique by modeling the problem as a two stage decision problem. The first stage involves binary decision variables for if one wants to incur the fixed cost. Based on the decision on fixed charge, one decides how many to produce. The logical upper bound imposes the logical constraints that no positive amount can be produced when the decision on incurring fixed charge is no.
