Swift Sports Club (SSC) is a health company and selling three types of high-energy products: cakes, milk and candy bar, to gyms and health food shops. Milk are the newest of the product of the three products and were first launched three months ago. Each of the three products has two special ingredients, sourced from a remote part of the world. The first of these, gincin, is a super-energising rare type of caffeine. The second, alfafa, is derived from an unusual plant believed to have miraculous health benefits.

SSC projected manufacture costs and selling prices for the three products are as follows:

CakesCandy barMilk

Per UnitsGhcGhcGhc

Selling price5.404.906.00

Costs:

Ingredient: Gincin (Ghc1.20/g)0.300.601.20

Ingredient: Alfafa (Ghc1.50/g)0.750.301.50

Other ingredients0.250.450.90

Labour (Ghc 10 /hour)1.001.200.80

Variable overheads0.500.600.40

Contribution2.601.751.20

For each of the three products, the expected demand for the next three month is 11,200 cakes, 9,800 candy bar and 2,500 milk.

The total fixed cost for the next three month are Ghc 3,000

SSC has just found out that the supply of Alfafa is going to be limited to 12,200 grams next month, prior to this, SSC had signed a contract with a leading chain of gyms, Encompass health to supply it with 5,000 milk each month, at a discounted price of Ghc 5.80 per milk, starting immediately. The order for the 5,000 milk is not included in the expected demand levels above.

Required:

I. Assuming that SSC keeps to its agreement with Encompass health, calculate the shortage of Alfafa, the resulting optimum production plan and the total profit for the next month.

One month later, the supply of Alfafa is still limited and SSC is considering whether it should breach its contract with Encompass health so that it can optimize its profit.

Required:

II. Discuss whether SSC should breach the agreement with Encompass health

Note: No further calculations are required: