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    Case 16-1 - Hospital Supply, Inc.

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    Ebans Castillo Bennett
    1. Hospital Supply can produce 3000 regular units for $4,290,000 in fixed costs and break even at 1882 units, with break even sales of $4,185,461. 2. Reducing the price from $4350 to $3850 would decrease income by $610,000 due to higher volume not offsetting the lower price. 3. Accepting the government contract would decrease income by $617,500 compared to not accepting it, due to lower contribution margin from the contract units.

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    Case 16-1 - Hospital Supply, Inc.

    Uploaded by

    Ebans Castillo Bennett
    35 views5 pages
    1. Hospital Supply can produce 3000 regular units for $4,290,000 in fixed costs and break even at 1882 units, with break even sales of $4,185,461. 2. Reducing the price from $4350 to $3850 would decrease income by $610,000 due to higher volume not offsetting the lower price. 3. Accepting the government contract would decrease income by $617,500 compared to not accepting it, due to lower contribution margin from the contract units.

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    Case 16-1- Hospital Supply, Inc.

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    1. Hospital Supply can produce 3000 regular units for $4,290,000 in fixed costs and break even at 1882 units, with break even sales of $4,185,461. 2. Reducing the price from $4350 to $3850 would decrease income by $610,000 due to higher volume not offsetting the lower price. 3. Accepting the government contract would decrease income by $617,500 compared to not accepting it, due to lower contribution margin from the contract units.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    35 views5 pages

    Case 16-1 - Hospital Supply, Inc.

    Uploaded by

    Ebans Castillo Bennett
    1. Hospital Supply can produce 3000 regular units for $4,290,000 in fixed costs and break even at 1882 units, with break even sales of $4,185,461. 2. Reducing the price from $4350 to $3850 would decrease income by $610,000 due to higher volume not offsetting the lower price. 3. Accepting the government contract would decrease income by $617,500 compared to not accepting it, due to lower contribution margin from the contract units.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    of 5

    Ebans Castillo Bennett

    ACC 770

    M1 Case 16-1:

    Hospital Supply, Inc.


    1. Total fixed costs= fixed cost per unit times normal volume

    ($660+$770)*3000= $4290000

    margin per unit= unit price minus variables costs

    $4350-$2070=$2280

    Break-even volume= $4290000/$2280= 1882 units

    Break-even sales= $4290000/($4350-2070/$4350)=&8185461

    2. Recommendation to lower price reduces income. Factors like, the reduction of available
    capacity, the capacity and the impact on market share, could be affected.

    Impact Before Price After Price Reduction Difference


    Reduction
    Price $4350 $3850 $(500)
    Quantity 3000 3500 500
    Revenue $13050000 $13475000 $425000
    Variable mgf costs (5385000) (6282500) (897500)
    Variable mktg costs (825000) (962500) (137500)
    Contribution margin 6840000 6230000 (610000)
    Fixed mgf costs (1980000) (1980000)
    Fixed mktg. cots (2310000) (2310000)
    Income $2550000 $1940000 $(610000)

    3. Recommendation to not accept the contract.

    Without With Government Contract


    Govt.
    Contract
    Impact Contract Regular Government Total Difference
    Revenue $17400000 $15225000 $1420000 $16645000 $(755000)
    Variable mfg (7180000) (6282500) (897500) (7180000)
    Variable (1100000) (962500) (962500) 137500
    mktg costs
    Contribution 9120000 7980000 522500 8502500 (617500)
    margin
    Fixed mfg (1980000) (1980000)
    costs
    Fixed mktg (2310000) (2310000)
    costs
    Income $4830000 $4212500 $(617500)

    4. Minimum price= variable mfg costs+ shipping costs + order costs

    $1795+$410+$22000/1000= $2227

    at this price per unit the $2227000 of differential costs caused by the 1000 unit order will just
    be uncovered.

    5. The manufacturing costs are sunk, so, any price excess of the differential costs of selling
    the hoist will add to income. Those differential costs are apparently the $275 per unit
    variable marketing costs, since the hoist are to be sold through regular channels.
    6.

    All Production In-House 1,000 Units Contracted


    Total revenue $13050000 $13050000
    Total variable marketing (5385000) (3590000)
    costs
    Total variable marketing (825000) (770000)
    costs
    Total contribution margin 6840000 8690000
    Total fixed manufacturing (1980000) (1386000)
    costs
    Total fixed marketing costs 2310000 (2310000)
    Payment to contractor _________ ____X___
    Income $2550000 4994000-X

    $4994000-X=$2550000
    X= $2444000 per unit maximum purchase price

    Therefore, $2475purchase price is not acceptable, it would decrease income.

    7.
    Contract 1000 Regular Hoist
    and Produce 800 Modified
    Hoist
    3000 Regular Regular (In) Regular (Out) Modified Total
    Hoist
    Produced In-
    House
    Revenue 13050000 8700000 4350000 3960000 17010000
    Variable mfg. (585000) (3590000) (2420000) (6010000
    costs
    Variable (825000) (550000) (220000) (440000) (1210000)
    mktg costs
    Contribution 6840000 4560000 4130000 1100000 9790000
    margin
    Fixed mfg (1980000) (1980000)
    costs
    Fixed mktg (2310000) (2310000)
    costs
    Payment to __---_____ --- (X) -- __(X)__
    contractor
    Income $2550000 $5500000-X

    Maximum payment= $2950000.


    Accept proposal as a price of $2475.
    Reference:

    accounting: text and cases (13th ed.). (2011). [E-book]. Anthony, R.N.


    https://mega.nz/file/oywGSSra#UEJBqfKP4usdhRQfN9PojsIbmBr4HJaW7Eym3IJs3ck

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