SUBMITTED BY:- Erika Laskar

ROLL NO.-45

SEC-A

REFLECTION PAPER
ON
HOSPITAL SUPPLY
SUMMARY:

Hospital Supply, 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 is 3000 units per month. Based on its unit manufacturing costs and unit marketing costs
we may answer following questions.
ANSWERS TO QUESTIONS
1) Total fixed costs (TFC) = fixed costs per unit times normal volume =($660 +
$770)*3,000 = $4,290,000.
Contribution margin per unit = unit price minus unit variable costs = $4,350 - $2,070
= $2,280.
Break-even volume:
4,290,000/2,280 = 1,882 units
Break-even sales:
4,290,000/((4,350-2,070)/4,350) = $8,185,46
2)

Regular price With price reduction Difference

Quantity (Q) 3,000 3,500 500

Price (P) 4,350 3,850 500
Revenue $ (P x Q) 13,050,000 13,475,000 425,000
Fixed costs (FC)4,290,000 4,290,000 0
Variable costs (VC)6,210,000 7,245,000 1,035,000
Total costs (FC+VC) 10,500,000 11,535,000
Income (with regular price) = Revenue - Total costs
= $13,050,000 - $10,500,000
= $2,550,000
Income (after price reduction) = $13,475,000 - $11,535,000
= $1,940,000
From the analysis above, reduction in price resulted in decreasing of income
($1,940,000 - $2,550,000 = $610,000). Thus, we would not recommend this
measure to take effect even though price reduction has its advantages such as
increasing demand

SUBMITTED BY:- Erika Laskar

ROLL NO.-45

SEC-A

3)I recommend that the contract should not be accepted. Income would be lower if the
contract with the government is accepted by a difference of $617,500.
On Regular Sales (if govt contract is accepted)

500*2280=1140000

Income FromGovt Contract

Fixed Fee
Share of Fixed Manufacturing Costs

275000
247500
-----------

522500
-------------

Differential Income if contract accepted617500

4)Minimum price = variable mfg costs + shipping costs + order costs

= $1,795 + $410 + $22,000/1,000 = $2,227

5)The manufacturing costs are sunk; therefore, any price in excess of the differential costs
of selling the hoists will add to income. In this case, those differential costs are apparently
the $275 per unit variable marketing costs, since the hoists are to be sold through regular
channels; thus the minimum price is $275.

LEARNING
About Fixed Cost dichotomy and break even analysis