Pick the best alternative courses of action in this case, and state why did you pick it.

Declare the step-by-step process on how you can do it (by choosing the best alternative courses of action).

City Hospital, Inc produces hydraulic hoists that were used by hospitals to move bedridden patients. The costs of manufacturing and marketing hydraulic hoists at the companys normal volume of 3,000 unit per month are as follows:

Exhibit 1: Costs per Unit of Hydraulic Hoists
Unit Manufacturing Costs		$	$
	Variable Materials	550.00
	Variable Labor	825.00
	Variable Overhead	420.00
	Fixed Overhead	660.00
	Total Unit Manufacturing Costs		2,455.00
Unit Marketing Costs
	Variable	275.00
	Fixed	770.00
	Total Unit Marketing Costs		1,045.00
Total Unit Costs			3,500.00

II. Statement of the Problem

How will the company maximize its profit given with different business scenarios that the company might enter into?

III. Statement of the Objectives

The case analysis aims to answer the following objectives:

To be able to determine how much the company could sale to identify the break-even point and the quantity to which the company could earn profit.

To identify the best alternative course to that will provide the maximum profit for the company.

To determine the maximum unit of production to maximize the profit.

IV. Point of View

The analysis of the case will be taking the point of view of the management of Hospital Supply Inc.

V. Analysis of Facts and Areas of Consideration

The analysis of the case would involve answering the following questions.

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

Answer: Break-even analysis is used to determine the level of production to which the company will be able to cover expenses. This is the point where in the revenue is equal to costs. To determine the break-even sales volume, the formula would be total fixed cost divided by the difference of selling price and variable cost. To compute for the break-even sales, the break-even volume will be multiplied by the unit price. Currently, the break-even volume is at 1,882 units and the break-even sales is at $8,186,700.

Break-even Volume= Total Fixed CostUnit Price-Unit Variable Cost= (660+770)*3,0004,350-2,070=1,882 units

Break-even sales=Break-even Volume*Unit Price=1,882units*$4,350=$8,186,700

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?

Answer: It is not suggested that the action will be taken as this would cause decrease the income of the company by $610,000. While revenue increased by $425,000, the decrease in variable costs is significantly higher with $897,000 in variable manufacturing costs and $137,500 in variable marketing costs. In addition, the fixed costs has not changed in the two scenarios.

		Before Price		After Price
		Reduction		Reduction		Difference
Impact		$		$		$
Price		4,350.00		3,850.00
Quantity		3,000.00		3,500.00
Revenue		13,050,000.00		13,475,000.00		(425,000.00)
Variable Manufacturing Costs		(5,385,000.00)		(6,282,500.00)		897,500.00
Variable Marketing Costs		(825,000.00)		(962,500.00)		137,500.00
	Contribution Margin	6,840,000.00		6,230,000.00		610,000.00
Fixed Manufacturing Costs		(1,980,000.00)		(1,980,000.00)		-
Fixed Marketing Costs		(2,310,000.00)		(2,310,000.00)		-
	Income	2,550,000.00		1,940,000.00		610,000.00

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 governments share of March production costs, plus pay a fixed fee (profit) of $275,000. (There would be no variable marketing costs incurred on the governments units.) What impact would accepting the government contract have on March income?

Answer: The total income will decrease by $865,000. The income when 4,000 units is sold to outside customer will be $4,830,000 and the income when 500 units will be sold to the government is $3,965,000.

		Without Gov't		With Gov't
		Contract		Contract		Difference
Impact		$		$		$
Revenue		17,400,000.00		16,397,500.00		1,002,500.00
Variable Manufacturing Costs		(7,180,000.00)		(7,180,000.00)		-
Variable Marketing Costs		(1,100,000.00)		(962,500.00)		(137,500.00)
	Contribution Margin	9,120,000.00		8,255,000.00		865,000.00
Fixed Manufacturing Costs		(1,980,000.00)		(1,980,000.00)		-
Fixed Marketing Costs		(2,310,000.00)		(2,310,000.00)		-
	Income	4,830,000.00		3,965,000.00		865,000.00

Computation of With Gov't Contract
		Regular		Gov't
		Contract		Contract		Total
Impact		$		$		$
Revenue		15,225,000.00		1,172,500.00		16,397,500.00
Variable Manufacturing Costs		(6,282,500.00)		(897,500.00)		(7,180,000.00)
Variable Marketing Costs		(962,500.00)				(962,500.00)
	Contribution Margin	7,980,000.00		275,000.00		8,255,000.00
Fixed Manufacturing Costs		(1,980,000.00)				(1,980,000.00)
Fixed Marketing Costs		(2,310,000.00)				(2,310,000.00)
	Income	3,690,000.00		275,000.00		3,965,000.00

City Hospital Inc 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?

Answer: The minimum price that the company should consider in a foreign market is $2,227 per unit.

Minimum Unit Price = Variable Manufacturing Cost + Shipping Cost + Order Cost

= $ 1,795 + $ 410 + ($ 22,000/ 1,000 units)

= $ 2,227/unit

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?

Answer: It should be $275 per unit of variable manufacturing cost.

A proposal is received from an outside contractor who will make 1,000 hydraulic hoist units per month and ship them directly to Hospital Supplys customers as orders are received from Hospital Supplys sales force. Hospital Supplys 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 Supplys 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?

Answer: The maximum unit price to be accepted is $2,444 ($2,444,000/1000 units). The amount of $2,475 is not acceptable as this will decrease the income of the company by $31,000 [(2,475-2,444) * 1,000].

		All In Production		1,000 Units
		House		Controlled		Difference
Impact		$		$		$
Revenue		13,050,000.00		13,050,000.00		-
Variable Manufacturing Costs		(5,385,000.00)		(3,590,000.00)		(1,795,000.00)
Variable Marketing Costs		(825,000.00)		(770,000.00)		(55,000.00)
	Contribution Margin	6,840,000.00		8,690,000.00		(1,850,000.00)
Fixed Manufacturing Costs		(1,980,000.00)		(1,386,000.00)		(594,000.00)
Fixed Marketing Costs		(2,310,000.00)		(2,310,000.00)		-
	Income	2,550,000.00		4,994,000.00		(2,444,000.00)

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 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?

Answer: The maximum payment to be accepted is $2,950,000 or $2,950 per unit. Since the offer is at $2,475, the offer can now be accepted.

		1,000 Units		Total New
		Controlled		Contract		Difference
Impact		$		$		$
Revenue		13,050,000.00		17,010,000.00		(3,960,000.00)
Variable Manufacturing Costs		(5,385,000.00)		(6,010,000.00)		625,000.00
Variable Marketing Costs		(825,000.00)		(1,210,000.00)		385,000.00
	Contribution Margin	6,840,000.00		9,790,000.00		(2,950,000.00)
Fixed Manufacturing Costs		(1,980,000.00)		(1,980,000.00)		-
Fixed Marketing Costs		(2,310,000.00)		(2,310,000.00)		-
	Income	2,550,000.00		5,500,000.00		(2,950,000.00)

New Contract
Contract to produce 1,000 Regular Hoists and 800 Modified Hosts
		Regular (in)		Regular (out)		Modified		Total
Impact		$		$		$		$
Revenue		8,700,000.00		4,350,000.00		3,960,000.00		17,010,000.00
Variable Manufacturing Costs		(3,590,000.00)		-		(2,420,000.00)		(6,010,000.00)
Variable Marketing Costs		(550,000.00)		(220,000.00)		(440,000.00)		(1,210,000.00)
	Contribution Margin	4,560,000.00		4,130,000.00		1,100,000.00		9,790,000.00
Fixed Manufacturing Costs		(1,980,000.00)						(1,980,000.00)
Fixed Marketing Costs		(2,310,000.00)						(2,310,000.00)
	Income	270,000.00		4,130,000.00		1,100,000.00		5,500,000.00

VI. Alternative Courses of Action

The company can maximize its profit given with different business scenarios that the company might enter into through :

1) Increasing the price per unit.

2) Decreasing the variable cost of Manufacturing the product ie. variable materials , variable labor and variable manufacturing overhead.

3) Decreasing the variable marketing costs to sell the product.

The company can maximize its profit given with different business scenarios that the company might enter into through :

1) Increasing the price per unit.

Advantages:

Short-term profits will increase

Overall revenue will increase even with less sales.

Disadvantages:

Market share will decrease.

Future sales might drop as customer retention might not happen and customers will go to other competitors' product.

2) Decreasing the variable cost of Manufacturing the product ie. variable materials, variable labor and variable manufacturing overhead.

Advantages:

Margin for profit increases

Sales tactics like discounts can be used to increase sales

Disadvantages:

Quality of product might suffer.

Time to breakeven increases.

3) Decreasing the variable marketing costs to sell the product.

Advantages:

Margin for profit increases.

Sales tactics like discounts can be used to increase sales.

Disadvantages:

Visibility of the product decreases, could lead to drop in sales.

Competitors might use this to advantage to ambush the market and gain market share.

VII. Recommendation and Implementation.