Hospital Supply Inc

Topics: Variable cost, Contribution margin, Cost Pages: 1 (467 words) Published: November 2, 2014

Hospital Supply, Inc. needs to sell 1,882 units to break even and make $8,186,700 to break even in sales dollars. Hospital Supply, Inc. should not sell units at lower prices, $3,850 compared to $4,350, even though 500 more units will be sold. Although revenues increase by 425,000 due to the variable costs increasing, there is a smaller contribution margin. Because there is a $610,000 drop in contribution margin, net income is lowered from $2,550,000 to $1,940,000. Hospital Supply, Inc. should also not accept the government contract because it reduces income by $617,500. Without the government contract, Hospital Supply, Inc. would have an income of $4,830,000; however, with the government contract, they would have a net income of $4,212,500. The minimum unit price that Hospital Supply, Inc. should consider consists of the variable manufacturing costs, the shipping costs, and the order costs with regard to the foreign market. The fixed costs are not included because they will stay the same regardless of entering a new foreign market. The minimum price they should consider would be $2,227 per unit. Anything below this would not be beneficial to Hospital Supply, Inc. To sell the older model units, the company should sell them at a reduced price of minimum $275 before they become valueless. This amount will cover the variable marketing costs for the unit. Although the ideal price would be the total variable costs put into this unit, the minimum amount covered should include variable marketing costs. Before entering into a contract where the company would need to purchase 1,000 outside units, they would need to look at the total amount of income they would receive considering the fact that they would need to purchase the items elsewhere. By purchasing the items at a price of $2,475, the company would actually be losing money even though their variable costs and fixed marketing costs are reduced. The maximum price Hospital Supply, Inc. should pay per...
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