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VIEW THE STEP-BY-STEP SOLUTION TO:<br/>Question<br/>Eco Clean Fiji

has been producing two types of sanitizer ingredients, Aloe Organic andGrapefruit Grove, for use in production of hand sanitizers. Data regarding these two ingredients
are as follows:
Aloe Organic Grapefruit Grove
Machine hours required per unit 2.5 3.0
Standard cost per unit:
Direct material $4.50 $7.50
Direct labour 8.00 9.00
Manufacturing overhead:
Variable (applied on basis of direct labour hours) 4.00 4.50
Fixed (applied on basis of machine hours) 7.50 9.00
$24.00 $30.00
Eco Clean's annual requirement for these ingredients is 7000 units of Aloe Organic and 9000
units of Grapefruit Grove. Recently, Eco Clean's management decided to devote additional
machine time to other product lines, leaving only 36000 machine hours per year for producing
the bearings. An outside company, Westfarm Ltd, has offered to sell Eco Clean its annual
requirement of the ingredients at prices of $22.50 for Aloe Organic and $27.00 for Grapefruit Grove. Eco Clean wants to schedule the otherwise idle 36000 machine hours to produce
ingredients so that the firm can minimize costs (maximize net benefits). The selling cost per unit
is $6.50. The fixed selling and administrative costs is $25000. The average amount of capital
invested in the sanitizing machine is $320000 and Eco Clean's target return on investment is
18%.
Required
1. Calculate the net benefit (loss) per machine hour that would result if Eco Clean Fiji accepts
supplier's offer of $27 per unit for Grapefruit Grove.
2. Determine how many units of each ingredient should be manufactured or purchased to
maximize its net benefits of the limited resource of machine hours.
3. Suppose the management has decided to drop product Aloe Organic. Independent of
requirements 1 and 2, assume that Eco Clean's idle capacity of 36000 machine hours has a
traceable, avoidable annual fixed cost of $80000, which would be incurred only if some of
the spare capacity is used. Calculate the maximum price Eco Clean should pay a supplier for
component Grapefruit Grove.
4. Assume the company uses cost-plus pricing based on total variable costs to determine prices.
Calculate the price for each ingredient.

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