Case 16-1 Hospital Supply, Inc.
Advanced Management Accounting
Hospital Supply, Inc. is a company that produces hydraulic hoists to assist hospitals in moving patients that are bedridden. The normal volume of hydraulic hoists that Hospital Supply produces is 3,000 units per month. To produce the 3,000 units per month it costs Hospital Supply $3,500 to produce each hydraulic hoist with $2,455 allocated toward the manufacturing costs per unit and $1,045 allocated for marketing costs per unit.
1. For Hospital Supply to break-even they need to produce 1882 units each month and in sales dollars they need to make $8,187,023. (See Appendix A) 2. Based on marketing projections Hospital Supply, Inc. could be able to increase their production to 3,500 units a month. In order to produce the increase in units they will need to cut the sales price per unit from $4,300 down to $3,850. With the new estimates for production net income per month should be $1,940,000, with the costs being $11,535,000, and the sales being $13,475,000. The original projection was $2,550,000 of net income, with the costs being $10,500,000, and the sales being $13,050,000. We would not recommend that Hospital Supply take on the extra 500 units that are available for production as they will be decreasing their net income and substantially increasing their amount of costs. (See Appendix B) 3. Without the government contract in March the total sales will be $17,400,000 with costs of $12,570,000, giving the company a net income of $4,830,000 for that month. Although if Hospital Supply accepts the government contract for the 500 units their total sales for March will be $16,645,000, with costs of $12,432,500, giving the company a net income of $4,212,500 for that month. Accepting the government contract will result in a smaller amount of income in March for Hospital Supply. (See Appendix C) 4. Hospital Supply is exploring an opportunity that has arisen for them to enter a foreign market the help offset a slow period domestically. They would sell the hydraulic hoists in the foreign market so the inactive production facilities could be utilized during the decrease in demand domestically. From our calculations the minimum unit price that Hospital Supply should consider for the foreign order of 1,000 units is $2,227. (See Appendix D) 5. Hospital Supply currently has an inventory of 200 units of a model that have become obsolete. Soon these remaining units will become valueless unless they are sold at reduced prices. In our opinion Hospital Supply should accept any reasonable offers for the purchase of the obsolete units because they have already sunk the cost of production and it is better for the company to make some sales from the units than have them become valueless and get nothing. 6. An outside contractor has submitted a proposal to manufacture 1,000 hydraulic hoist units per month and ship them directly to the customers that Hospital Supply received orders from. Hospital Supply will have to pay $2,475 per unit to the contractor should they choose to accept the proposal. Also affected by the acceptance of the proposal is the variable marketing costs which would be cut by 20 percent for the contracted units and the fixed manufacturing costs will also be cut by 30 percent. The in-house unit cost that Hospital Supply will use for comparisons to the quotation that they received is $3,500 We do not think that Hospital Supply should accept the proposal that is submitted by the contractor. The reason that we are saying this is because with the contract, the costs incurred will total $10,525,000; which is $25,000 more each month than if the company manufactures the entire 3,000 units per month by itself. ( See Appendix E). 7. With the same proposal that was submitted by the contractor in question 6, Hospital Supply is considering using the idle facilities cause by the outsourcing to produce 800 modified hydraulic hoists per...
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