# Hospital Supply, Inc.

Topics: Variable cost, Costs, Total cost Pages: 7 (1578 words) Published: August 15, 2010
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G R O U P C A S E 3: H O S P I T A L S U P P L Y, I N C

Given Information:

Hospital Supply, Inc.’s Normal Volume (in units per month)| 3,000| Regular Selling Price (per unit)| 4,350|

Costs per Unit for Hydraulic Hoists |  |  |
Unit Manufacturing Costs:|  |  |
Variable Materials | 550|  |
Variable Labor | 825|  |
Total Unit Manufacturing Costs |  | \$2,455 |
| |  |
Unit Marketing Costs:|  |  |
Variable| 275|  |
Fixed | 770|  |
Total Unit Marketing Costs|  | 1,045|
| |  |
Total Unit Costs |  | \$3,500 |

1) What is the break-even volume in units, and in sales dollars?

Total Fixed Costs| 4,290,000.00|
Total Variable Costs per unit| 2,070.00 |
Contribution Margin per unit| 2,280.00 |
Contribution Margin Ratio| 0.52 |
Break-even Point in Units| 1,882 |
Break-even Point in Sales Dollars | \$8,184,868.42|

2) Market research estimates that monthly volume could increase to 3,500 units, which is well within hoist production capacity limitations, if the price were cut from \$4,350 to \$3,850 per unit. Assuming the cost behavior patterns implied by the given data are correct, would you recommend that this action be taken? Explain and show the basis of your answer.

Increase in Volume| 3,500.00|
New Price per Unit| 3,850.00|

| Before PriceReduction| After PriceReduction| Difference| Revenue| 13,050,000| 13,475,000| -425,000|
Variable Marketing Costs| 825,000| 962,500| -137,500|
Variable Manufacturing Costs| 5,385,000| 6,282,500| -897,500| Contribution Margin| 6,840,000| 6,230,000| 610,000|
Fixed Marketing Costs| 2,310,000| 2,310,000| 0|
Fixed Manufacturing Costs| 1,980,000| 1,980,000| 0|
Income| 2,550,000| 1,940,000| 610,000|

Reducing the prices reduced the net income by 610,000. Therefore, it is not recommended that the action be taken.

3) On March 1 a contract offer is made to Hospital Supply by the government to supply 500 units to its hospitals for delivery by March 31. Because of an unusually large number of rush orders from its regular customers, Hospital Supply plans to produce 4,000 units during March, which will use all available capacity. If the government order is accepted, 500 units normally sold to regular customers would be lost to a competitor. The contract given by the government would reimburse the government’s share of March production costs, plus pay a fixed fee (profit) of \$275,000. (There would be no variable marketing costs incurred on the government’s units.) Explain and show the basis on whether the government contract should be accepted.

March Production (in units)| 4,000|
Contribution Margin| 2,280|
Government's Share of March Production| 0.125|
March Production Costs| 1,980,000 |
| |
Fixed Fee| \$275,000 |
Reimbursement| 247,500 |
Total Income from Government Contract| \$522,500 |
Forgone Income| (1,140,000) |
Difference in Income with Contract| \$ (617,500)|

Accepting the government contract will cause a \$617,500 decrease in income since the forgone income from the 500 units lost to the competitor is way larger that the amount received from the government contract. Hence, the government contract should not be accepted.

4) Hospital Supply has an opportunity to enter a foreign market in which price competition is keen. An attraction of the foreign market is that demand there is greatest when demand in the domestic market...