CASE 3 Hospital Supply, Inc

Hospital Supply, Inc. produced hydraulic hoist that were used by hospitals to move bedridden patients. Thecost of manufacturing and marketing hydraulic hoists at the company’s normal volume of 3,000 units permonth are shown in Exhibit 1.

Exhibit 1
Costs per unit for Hydraulic Hoists
Unit manufacturing costs:
Variable materials $550
Variable labor 825
Variable overhead 420
Fixed overhead 660
Total unit manufacturing costs $2,455

Unit marketing costs:
Variable$ 275
Fixed 770

Total unit marketing costs 1,045
Total unit costs$ 3,500

The following questions refer only to the data given in Exhibit 1. Unless otherwise stated, assume there is no
connection between the situations described in the questions; treat each independently. Unless otherwise stated, assume a regular selling price of $4,350 per unit. Ignore income taxes and other costs not mentioned in Exhibit 1 or in a question itself.

1. What is the break-even volume in units? In sales dollars?

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 data in Exhibit 1 are correct, would you recommend that this action be taken? What would be the impact on
monthly sales, costs, and income?

3. On March 1, a contract offer is made to City Hospital,Inc by the federal government to supply 500
units toVeteransAdministration hospitals for delivery by March 31. Because of an unusually large
number of rush orders from its regular customers, City Hospital 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 ofMarch production 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?

4. City hospital inc 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 is quite low; thus, idle production facilities could be used without affecting domestic business. An order for 1,000 units is being sought at a below-normal price in order to enter this market. Shipping costsfor 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 City hospital inc 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 reduced prices or the inventory will soon be valueless. What is the
minimum price that would be acceptable in selling these units?

6. A proposal is received from an outside contractor who will make 1,000 hydraulic hoist units per
month and ship them directly to City Hospital’s customers as orders are received from City Hospital’s sales force. City Hospital’s fixed marketing costs would be unaffected, but its variable marketing costs would be cut by 20 percent (to $220 per unit) for these 1,000 units produced by the contractor. City Hospital’s plant would operate at two-thirds of its normal level, and total fixed manufacturing costs would be cut by 30 percent (to $1,386,000).
What in-house unit cost should 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?

7. Assume the same facts as above in Question 6 except that the idle facilities would be used to produce
800 modified hydraulic hoists per month for use in hospital operating rooms. These modified hoists 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 City Hospital,Inc should be willing to pay the outside contractor?
Should the proposal be accepted for a price of $2,475 per unit to the contractor

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