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 per month are shown in Exhibit 1.

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?

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 Hospital Supply by the federal government to supply 500 units to Veterans 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?

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?

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?

EXHIBIT 1 Costs per Unit for Hydraulic Hoists Unit manufacturing costs: Variable materials $550 Variable labor 825 Variable overhead 420 Fixed overhead @ Total unit manufacturing costs Unit marketing costs Variable 275 Fixed E Total unit marketing costs Total unit costs $2,455