Hospital Supply, Inc.

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 3000 units per month are shown in Exhibit 1.

EXHIBIT 1 Costs per Unit of hydraulic hoists

Unit manufacturing costs:

Variable materials $ 550
Variable labour 825
Variable overhead 420
Fixed overhead 660

Total unit manufacturing costs $ 2455

Unit marketing costs:

Variable 275
Fixed 770
Total unit marketing costs 1045
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TOTAL UNIT COSTS $ 3500
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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 them independently. Unless otherwise stated, assume a regular selling
price of $ 4350 per unit. Ignore income tax and any other costs not mentioned in
Exhibit 1 or in a question itself.

Questions:

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

2. Market research estimates that monthly volume could increase to 3500
units, which is well within hoist production capacity limitations, if the
price were cut from $ 4350 to $ 3850 per unit. Assuming costs behavior
patterns implied by the data in Exhibit 1 are correct, would you
recommend this action? What would be the impact on monthly sales,
costs, and income?
3. On March 1, a contract offer is made to Hospital Supply, Inc. by the
federal government to supply 500 units to Veteran 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 4000 units during March, which will use all available capacity. If
the government order is accepted, 500 units normally supplied 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 a fixed fee (profit) of $ 275,000. (There would be
no marketing costs incurred on the government’s units) What impact
would accepting the government contract have on March income?

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 is quite
low; thus idle production facilities could be used without affecting the
domestic business. An order for 1000 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 Supply should
consider for this order of 1000 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
should be acceptable in selling these units?

6. A proposal is received from an outside contractor who will make 1000

hydraulic hoist units per month and ship them 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 by 20 percent (to $ 220 per unit)
for these 1000 units produced by the contractor .Hospital Supply’s plant
would operate at two third 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 $ 2475 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 3000 regular hoists were manufactured or the mix of 2000
regular hoists were manufactured or the mix of 2000 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 2475 per unit
to the contractor?