Hospital Supply

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  • Topic: Variable cost, Costs, Contribution margin
  • Pages : 4 (807 words )
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  • Published : February 24, 2013
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CASE 16-1: HOSPITAL SUPPLY INC. I. BACKGROUND OF THE CASE

Hospital Supply, Inc., a producer of hydraulic hoists used by hospitals to move bedridden patients operates at a normal level of 3,000 units per month. However, the company believes it can actually earn more profits by structuring its volume of production. II. PROBLEMS

The company has the opportunity to: a. b. c. d. III. Increase the volume to maximize capacity Accept contracts to manufacture stated number of units Enter new markets; and Outsource some of its production to outside contractors ACTION PLAN

1. Break-even volume in units and dollar A. Break-even Sales in Units = Total Fixed Costs / Unit Contribution Margin = (660 + 770) * 3,000 4,350 - 2,070 4,290,000 2,280 1,882 units

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B. Break-even Sales in Dollar = Total Fixed Costs / Contribution Margin Ratio = (660 + 770) * 3,000 4,350 - 2,070 4,290,000 (4,350-2,070)/4,350 $8,185,461 ACC510M | 1

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2. What would you recommend that this action be taken? What would be the impact on monthly sales, costs, and income? It would only take 1,882 units to break even in the old estimate whereas 2,812 units in the new estimate. It means they need to produce more units just to recover all the costs they incurred. In addition, reducing the selling price means a clear reduction in net profits. Kindly see below table for the effects on sales, costs, and income. Old Estimate 4,350 3,000 $13,050,000 550 825 420 275 $1,650,000 2,475,000 1,260,000 825,000 6,210,000 6,840,000 660 770 1,980,000 2,310,000 4,290,000 $2,550,000 New Estimate 3,850 3,500 $13,475,000 $1,925,000 2,887,500 1,470,000 962,500 7,245,000 6,230,000 1,980,000 2,310,000 4,290,000 $1,940,000 Net Effect (500) 500 $(250,000) $275,000 412,500 210,000 137,500 1,035,000 (610,000)

Price Quantity Total Sales Variable costs Materials Labor Overhead Variable Marketing Total Variable Contribution Margin Fixed Costs Overhead Fixed Manufacturing Total Fixed Costs Income

$(610,000)...
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