AKT 18-M

Nama : 1. Alfi Faridatus S

2. Yessy Noviyanti Kawi

Case 16–1
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 3,000 units

Questions
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?

Fixed Cost (660+770) .3,000 4,290,000
Break-even volume (units) = = 4,350−(550+825+420+275) = = 1881.5789 ≈ 1,882
Unit Contribution 2,280
units
Fixed Cost 4,290,000 4,290,000
Break-even sales = = ((4,350−2,070)/4,350) = =$ 8,184,868
Contribution Percent 52.41%

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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?
Before price reduction After price reduction Difference
Quantity 3,000 3,500 500
Price $4,350 $3,850 $(500)
Total Revenue $13,050,000 $13,475,000 $425,000
Var. Manufacturing Cost ($5,385,000) ($6,282,500) $(897,500)
Var. Marketing Cost ($825,000) ($962,500) $(137,500)
Contribution Margin $6,840,000 $6,230,000 $(610,000)
Fixed Manufacturing Cost (1,980,000) (1,980,000) -
Fixed Marketing Cost (2,310,000) (2,310,000) -
Total Income $2,550,000 $1,940,000 $(610,000)

Recommend : Not recommended to be taken. Because Total Income After is lower than Before. The minimal
new price must higher than $4,025.

Impact new price on monthly sales : Increase

Impact new price on costs : Increase
Impact new price on Income : Decrease

3. On March 1, a contract offer is made to Hospital Supply by the federal government to supply 500 units
toVeterans 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 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?
Without Government With Government
Difference
Contract Contract
Total Revenue $17,400,000 $16,645,000 ($755,000)
Var. Manufacturing Cost ($7,180,000) ($7,180,000) -
Var. Marketing Cost ($1,100,000) ($962,500) $137,500
Contribution Margin $9,120,000 $8,502,500 $(617,500)
Fixed Manufacturing Cost (1,980,000) (1,980,000) -
Fixed Marketing Cost (2,310,000) (2,310,000) -
Total Income $4,830,000 $4,212,500 $(617,500)
Revenue with Government contract : (3,500 x 4,350) + (500 x 1,795) + (500/4000 x 1,980,000) +275,000

The impact if Hospital Supply accept the government contract is reduce income $617,500 on March.

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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 domestic business. An 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 Supply should consider
for this order of 1,000 units?

Minimum price = Variable cost + Shipping cost + marketing costs = $1,795 + $410 + ($22,000/1000) = $2,227

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?
Minimum price = variable marketing cost = $275 per unit

6. A proposal is received from an outside contractor who will make 1,000 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 1,000 units produced by the contractor. Hospital Supply’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?
in-House Production Proposal
Total Revenue $13,050,000 $13,050,000
Var. Manufacturing Cost ($5,385,000) ($3,590,000)
Var. Marketing Cost ($825,000) ($770,000)
Contribution Margin $6,840,000 $8,690,000
Fixed Manufacturing Cost (1,980,000) (1,386,000)
Fixed Marketing Cost (2,310,000) (2,310,000)
Payment to Contractor X
Total Income $2,550,000 $4,212,500-X

4,212,500 – X = 2,550,000
X = 4,212,500 – 2,250,000
X = 2,444,000
Or $2,444 per unit

Proposal should not be accepted for a price $2,475, because it would decrease income by (2,475-2,444) x
1,000 = $31,000.

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

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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?

in-House Production Proposal

Total Revenue $13,050,000 $17,010,000
Var. Manufacturing Cost ($5,385,000) ($6,010,000)
Var. Marketing Cost ($825,000) ($1,210,000)
Contribution Margin $6,840,000 $9,790,000
Fixed Manufacturing Cost (1,980,000) (1,980,000)
Fixed Marketing Cost (2,310,000) (2,310,000)
Payment to Contractor X
Total Income $2,550,000 $5,500,000-X

Maximum purchase price per unit that Hospital Supplt should be willing to pay the outside contractor

5,500,000 – X = 2,550,000
X = 5,500,000 - 2,550,000
X = 2,950,000 or 2,950 per unit

The proposal should be accepted for price $2,475 per unit.