II.STATEMENT OF PROBLEM2
The case is about manufacturing company, Hospital Supply, Inc., that produced hydraulic hoists for the local market. The hydraulic hoist is useful to the hospital for moving bedridden patients. Most of sales made to local hospitals. Significant to activity of sales and production of hydraulic hoist, there are costs incurred due to the consumption of resources. Presented in Exhibit 1 are the costs of manufacturing and marketing hydraulic hoists at the company’s normal volume of 3,000 units per month:
Exhibit 1 – Cost per Unit for Hydraulic Hoists.
Cost per Unit for Hydraulic Hoists.
Unit manufacturing cost:
Total unit manufacturing cost$2455
Unit marketing costs:
Total unit marketing costs$1045
Total unit cost$3500
STATEMENT OF PROBLEM
The overall case is about how Hospital Supply, Inc. can optimize its profit under various situations. Since profit results from the exceeds amount of sales income compare to the costs, therefore understanding the changes in sales volume, selling price and cost are very important to facilitate in making right decision.
Referring to the scenarios given below, this study helps to achieve the following objectives: 1. To understand the relationship between sales components and costs that will affect the Hospital Supply, Inc.’s profit. 2. To understand the significant of breakeven point that will lead Hospital Supply, Inc. to achieve profitable performance. 3. To evaluate a variety of ‘what-if’ questions on the sensitivity of total profit to different pricing strategies, sales volume forecasts or cost estimates. 4. To be able determine the right choice in the process of decision making.
The way this study is being presented is by referring to Exhibit 1 where each seven (7) Scenarios (Question) are treated independently unless stated otherwise.
As what others manufacturing company experienced, Hospital Supply, Inc. also have to manage their operating costs efficiently in response to the changes of level activity. Knowing how those costs react to the changes, this will facilitate Hospital Supply, Inc. to prepare forecast sales, allocate budget, determine the optimum production volume of Hydraulic Hoist and select the profitable option. In order to understand the relationship between sales components and costs that will affect the company performance in term of profit and market share, therefore, it is better to understand each component clearly.
For further explanation about the cost behavior, it is necessary to differentiate between fixed cost and variable cost. Fixed costs present same value in total regardless of the number of quantity produced or sold. Therefore, as volume increase the amount of fixed cost per unit will decrease. Meanwhile, variable cost will show different value in total each time the additional quantity is produced or sold.
In the scenario of Hospital Supply, Inc. other costs that are not stated in Exhibit 1 will be ignored in the following discussions. In the scope of cost behavior, the following Strategies require us to determine how changes in costs and volume affect Hospital Supply, Inc. operating income as well as net income. Therefore, along the way we will apply Cost-volume-profit (CVP) analysis in our calculation. In performing this analysis, the list of assumptions should be followed:
i. All cost are classified as either fixed or variable...