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Optimizing the Input Mix

Agronomists at Roma's banana Experimental Research Station, in preparation for the global commercialization of this fruit are seeking to implement the most cost-effective method of harvesting bananas, one that would result in "LONG-RUN" cost minimization.
They are contemplating the 2 alternatives described below:

PERFORM CALCULATIONS IN "ANNUAL TERMS" AND IN SO DOING ASSUME AN 8 HOUR WORKING DAY, AND 360 DAY WORKING YEAR. PLEASE SHOW THE WORK CLEARLY.

OPTION A: "THE LABOR INTENSIVE TECHNIQUE":
This approach uses simple mechanical equipment that can be leased for $145 per day and whose maintenance and operating costs amount to $1,280 per month. Each of the four relatively unskilled workers required to operate this machinery earns $7.15 per hour, including benefits. The harvesting capability of this technique is 21.5 pounds of bananas per hour.

OPTION B: "THE CAPITAL INTENSIVE TECHNIQUE"
This highly mechanized method allows the harvesting of 230 pounds of bananas per day and uses a very sophisticated piece of equipment whose quarterly leasing costs amount to $28,000. Its maintenance and operating expenses are $4,000 per month and the hourly wage rate of it's sole operator is $19.60 per hour, including benefits.

1. Which option would you recommend to be adopted to minimize harvesting costs. Why??
Assume that there is no statistically significant difference in the quality of the product harvested by either method.

2. Above what hourly wage rate would the option that you recommended in question 1 above no longer be the most advisable/cost effective one?

Solution Preview

Q1. Option B:
First calculate the total cost
Lease cost = 28000 per quarter * 4 quarters = 112,000
Maintenance and operations cost = 4000 per month *12 months = 48000
Labor cost = 19.60*8*360=56448
Total cost = 216448
Calculation the production and per unit cost
Total Production = ...

Solution Summary

The computations step-by-step guide you through this.

$2.19