16-1 Hospital Supply, Inc.

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| Costs per Unit for Hydraulic Hoists| |
|  | Unit Manufacturing Costs| | | |  | |
|  | Variable Materials| | $550 | |  | |
|  | Variable Labor| | | 825 | |  | |
|  | Variable overhead| | 420 | |  | |
|  | Fixed overhead| | | 660 | |  | |
|  | Total unit manufacturing costs| | | $2,455 |  | | |  | Unit Marketing Costs| | | |  | |
|  | Variable| | | 275 | |  | |
|  | Fixed| | | 770 | |  | |
|  | Total unit marketing costs| | | 1,045 |  | | |  | Total Unit Costs| | | | $3,500 |  | |
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1)| What is the break-even volume in units? In sales dollars?| | | | | | | | | | |
| | Fixed overhead| 660 | | Sell Price| $4,350 | | | | | Fixed Mktg| 770 | | VC| 2,070 | | |
| | | 1,430 | | Cont. Margin| $2,280 | | |
| | Normal Volume (units)| 3,000 | | | | | |
| | TFC| $4,290,000 | | | | | |
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| | TFC| $4,290,000 | | BE (units)| 1,882 | | |
| | Cont. Margin| 2,280 | | Sell price| $4,350 | | | | | Break-even Units| 1,882 | | Break-even Sales| $8,186,700 | | | | | | | | | | | |
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2)| Impact on monthly sales, costs, and income if monthly volume increases to 3,500 units, and selling price is reduced from $4,350 to $3,850 per unit.| | | | |
| | | | Current| w/Sell Price Reduction| Variance| | | | | Selling Price| | $4,350 | $3,850 | $(500)| | | | | Volume (in units)| | 3,000 | 3,500 | 500 | | | | | Sales Revenue| | $13,050,000 | $13,475,000 | $425,000 | | | | | Cost of Sales| | | | | | |

| | Variable Manufacturing| (5,385,000)| (6,282,500)| (897,500)| | | | | Variable Marketing| (825,000)| (962,500)| (137,500)| | | | | Contribution Margin| $6,840,000 | $6,230,000 | $(610,000)| | | | | Fixed Manufacturing| (1,980,000)| (1,980,000)| - | | | | | Fixed Marketing| | (2,310,000)| (2,310,000)| - | | | | | Net Income| | $2,550,000 | $1,940,000 | $(610,000)| | | | | | | | | | | |

| I would not recommend that price be reduced by $500.00 if volume increases by 500 units. As shown above, these actions will reduce net income by $610,000.00.| | | | |
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3)| Impact of accepting the government contract (4,000 units produced, 500 normal units lost, reimbursement of production costs, fixed fee (profit) of $275,000).| | | | |
| | | No Contract| | Gov't Contract| |
| | | Normal (4,000 units)| | Normal (3,500 units)| Gov't (500 units)| Total (4,000 units)| Variance| | Sales Revenue| | $17,400,000 | | $15,225,000 | $1,420,000 | $16,645,000 | $(755,000)| | Cost of Sales| | | | | | |

| Variable Manufacturing| (7,180,000)| | (6,282,500)| (897,500)| (7,180,000)| - | | Variable Marketing| (1,100,000)|  | (962,500)| - | (962,500)| 137,500 | | Contribution Margin| $9,120,000 | | $7,980,000 | $522,500 | $8,502,500 | $(617,500)| | Fixed Manufacturing| (1,980,000)| | | | (1,980,000)| - | | Fixed Marketing| (2,310,000)| | | | (2,310,000)| - | | Net Income| | $4,830,000 | | | | $4,212,500 | $(617,500)| | | | | | | | | |

| | Government Contract Calculations| | |
| | Total unit cost| 3,500 |  | Revenue| $897,500 | | | | | Total unit mktg| (1,045)| | 12.5% production costs| 247,500 | | | | | Fixed overhead| (660)| | Fixed fee| 275,000 | | | | | Gov't unit purchase price| $1,795 |  | Gov't Contract Revenue| $1,420,000 | | | | | | | | | | |...
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