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Lawrence Tapalla

on 12 February 2013

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Hospital Supply Inc.* Case 16-1 Hospital Supply Inc. produced hydraulic hoists that were used by hospitals to move bedridden patients.

The costs of manufacturing and marketing hydraulic hoists at the company's normal volume of 3,000 units per month are shown in Exhibit 1. Regular Selling Price : $4,350 per unit

Ignore Income taxes and other costs not mentioned in Exhibit 1 or in a question itself

Exhibit 1 What is the break-even volume in units?
In sales dollars?
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 data in Exhibit 1 are correct, would you recommend that this action be taken? What would be the impact on monthly sales, cost, and income NO, we discourage lowering of prices to increase number of production. This reduces the income to 23% of expected income. On March 1, a contract offer is made to Hospital Supply by the federal government to supply 500 units to Veterans Administration 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 productions costs, plus pay a fixed fee (Profit) of $275,000 (There would be no variable marketing costs incurred on the government's units). What impact would accepting the government contract have on March income? Recommendation: Do not Accept government offer. 4 3 2 1 Hospital Supply has an opportunity to enter a foreign market in which price competition is keen. Am attraction to foreign market is that demand there is greatest when demand in domestic market is quite low, thus, idle production facilities could be used without affecting domestic business. A order for 1,000 units is being sought at a below-normal price in order to enter this market. Shipping costs for this order will amount to $410 per unit. while total costs of obtaining the contract (marketing costs) will be $22,000. Domestic business would be unaffected by this order. What is the minimum unit price Hospital should consider for this order of 1,000 units? 5 An inventory of 200 units of an obsolete model of the hoist remains in the stockroom. These must be sold through regular channels at the reduced prices or the inventory will soon be valueless. What is the minimum price that would be acceptable in selling these units. The manufacturing costs are sunk; therefore, any price in excess of the differential cost of selling the hoists will add to income. In this case, those differential costs are apparently the $275 per unit variable marketing costs, since the hoists are to be sold through regular channels; thus, the minimum price is $275. In terms of opportunity cost, the price should exceed the sum of differential marketing costs and the potential scrap proceeds, which are an opportunity cost of selling the hoists rather than scrapping. This assumes, however, that sale of these "obsolete" hoists will not cut into sales of the current model. A proposal is received form an outside contractor who will make 1,000 hydraulic hoist units per month and ship the directly to Hospital Supply's customers as orders are received from Hospital Supply's sales force. Hospital Supply's fixed marketing costs would be unaffected but its variable marketing costs would be cut to 20% (to $220 per unit) for these 1,000 units produced by the contractor. Hospital Supply's plant would operate at two-thirds of its normal level, and total fixed manufacturing cost would be cut by 30 percent (to $1,386,000). What in-house unit cost would be used to compare with the quotation received from the supplier? Should the proposal be accepted for a price (i.e., payment to the contractor) of $2,475 per unit. 6 Assume the same facts as above in Question 6 accept that the idle facilities would be used to produce 800 modified hydraulic hoist per month for us in hospital operating rooms. These modified hoist could be sold for $4,950 each, while the variable manufacturing costs would be $3,025 per unit. Variable marketing costs would be $550 per unit. Fixed marketing and manufacturing costs would be unchanged whether the original 3,000 regular hoists were manufactured or the mix of 2,000 regular hoists plus 800 modified hoists was produced. What is the maximum purchase price per unit that Hospital Supply should be willing to pay the outside contractor. Should the proposal be accepted for a price of $2,475 per unit to the contractor? 7
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