1.A proposal is received from an outside contractor who will make and ship 1,000 hydraulic hoist units per month 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 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. What inhouse unit cost should be used to compare with the quotation received from the supplier? Should the proposal be accepted for a price (that is, payment to the contractor) of $425 per unit?

2.

Assume the same facts as above in Requirement 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 $900 each, while the costs of production would be $550 per unit variable manufacturing expense. Variable marketing costs would be $l00 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 were 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 $425 per unit to the contractor?