Hospital Hoist

Hospital Hoist is a supplier of hydraulic hoists for hospital use. These hoists are used a patients has a broken leg that needs to be elevated. The hoists typically sell at a price of 760 and the firms normal production and sales volume is 30,000 units/month. The firm uses a standard, full absorption, usage based cost system. Ignore taxes. The firms cost information is below.

Unit Manufacturing and Marketing Costs: ()

Direct Materials 110

Direct Labor 150

Variable Manufacturing Overhead 50

Fixed Manufacturing Overhead 120

Variable Marketing Costs 50

Fixed Marketing Costs 140

A. Find the break-even volume in units (i.e., the volume where profits = 0).

B. Should Hospital Hoist increase monthly production and sales to 35,000 units while decreasing price to 680/unit?

C. The firm has 2300 units of an obsolete model. These must be sold through regular channels (thus incurring the normal variable marketing costs) at reduced prices, or the inventory will be worthless soon. Assume that every two obsolete units sold will displace the sale of one unit of the current model. What is the minimum acceptable price for these units?

D. An outside contractor wants to make and ship 10,000 units/month directly to the firms customers, but the customers would continue to pay Hospital Hoist directly. The firms variable marketing costs would be reduced by 20% for the 10,000 outsourced units. The firm would produce hoists in-house at 2/3 of its normal level and its total fixed manufacturing costs would be cut by 25%. What is the maximum per unit price that Hospital Hoist would be willing to pay the outside contractor?

E. Same facts as in Part D, but now if Hospital Hoist outsources the production of 10,000 hoists/month, the idle capacity could be used to produce 8000 modified hoists/month that could be sold for 900 each. Variable manufacturing costs would be 550/unit and variable marketing costs would be 100/unit for the modified hoists. Total fixed costs would be same as when 30,000 regular hoists are produced. What is the maximum per unit price that Hospital Hoist would be willing to pay the outside contractor?