JOSEPH CHRISTIAN TOPULAR MONREAL

Masters in Business Administration

De La Salle University
ACC510M Management Accounting
CASE 16-1: HOSPITAL SUPPLY INC.
I.

BACKGROUND OF THE CASE

Hospital Supply, Inc., a producer of hydraulic hoists used by hospitals to move bedridden patients
operates at a normal level of 3,000 units per month. However, the company believes it can actually earn
more profits by structuring its volume of production.
II.

PROBLEMS

The company has the opportunity to:

a.
b.
c.
d.
III.

Increase the volume to maximize capacity

Accept contracts to manufacture stated number of units
Enter new markets; and
Outsource some of its production to outside contractors
ACTION PLAN

1. Break-even volume in units and dollar

A. Break-even Sales in Units
= Total Fixed Costs / Unit Contribution Margin
=

(660 + 770) * 3,000

4,350 - 2,070

4,290,000
2,280

1,882 units

B. Break-even Sales in Dollar

= Total Fixed Costs / Contribution Margin Ratio
=

(660 + 770) * 3,000

4,350 - 2,070
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4,290,000
(4,350-2,070)/4,350

$8,185,461

2. What would you recommend that this action be taken? What would be the impact on monthly
sales, costs, and income?
It would only take 1,882 units to break even in the old estimate whereas 2,812 units in the new
estimate. It means they need to produce more units just to recover all the costs they incurred. In
addition, reducing the selling price means a clear reduction in net profits. Kindly see below table for the
effects on sales, costs, and income.

Price
Quantity
Total Sales
Variable costs
Materials
Labor
Overhead
Variable Marketing
Total Variable

550
825
420
275

Contribution Margin
Fixed Costs
Overhead
Fixed Manufacturing
Total Fixed Costs

660
770

Income

Old Estimate
4,350
3,000

New Estimate
3,850
3,500

Net Effect
(500)
500

$13,050,000

$13,475,000

$(250,000)

$1,650,000
2,475,000
1,260,000
825,000
6,210,000

$1,925,000
2,887,500
1,470,000
962,500
7,245,000

$275,000
412,500
210,000
137,500
1,035,000

6,840,000

6,230,000

(610,000)

1,980,000
2,310,000
4,290,000

1,980,000
2,310,000
4,290,000

$2,550,000

$1,940,000

$(610,000)

3. The impact of accepting the government contract on Hospital Supplys income.

The consequence of accepting the government contract would result to lesser sales from Hospital
Supply since it would incur more profit if they continue to hold on to the existing customers. The
recommendation for this is do not accept.
Share of contribution margin from original customers
(500*2280)
New contract from government
Fixed payment from government

$1,140,000

$275,000
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Share of fixed costs-manufacturing

(500/4,000)*1,980,000
Should have been income from government contract
Difference in profit from 2 alternatives

247,500
522,500
$(617,500)

4. Minimum unit price Hospital Supply should consider for the order of $1,000 units.
Variable costs
Materials
Labor
Overhead
Shipping costs
Ordering costs ($22,000/1000 units)
Unit Revenue

$550
825
420
410
22
$2227

5. Minimum price that is acceptable in selling an obsolete model.

The acceptable minimum price for the obsolete model is the total variable marketing cost of $275. It is
given in the case that itll be sold thru regular channels. It shouldnt have any share in the fixed costs
since the expense allocated to the product has been long charged to the period when the old hoist was
manufactured.
6. In house cost to be used to compare to the quotation received from the supplier.
The $2,475 (payment to the contractor) purchase price will slightly decrease income and should not be
accepted. Kindly see computation below.
Variable costs
Materials
Labor
Overhead
Variable marketing opportunity cost ($275-220)
Fixed manufacturing opportunity cost [($1,980,000-$1,386,000)/1000]

$550
825
420
55
594
$2,444

7. Should the proposal be accepted for a price of $2,475 per unit to the contractor?
Proposal should be accepted since maximum payment is $2,950,000.

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Total Sales
Variable
Manufacturing
Variable
Marketing
Contribution
Margin
Fixed
Manufacturing
Fixed
Marketing

3,000
Regular
Hoists
Produced
in-House

Regular
(in)

Regular
(Out)

Modified

13,050,000

8,700,000

4,350,000

3,960,000

17,010,000

5,385,000

3,590,000

2,420,000

6,010,000

825,000

550,000

220,000

440,000

1,210,000

6,840,000

4,560,000

4,130,000

1,100,000

9,790,000

1,980,000

1,980,000

2,310,000
(x)

Income

Total

2,550,000

2,310,000
(x)
5,500,000 - X

To get maximum payment:

$2,550,000 = $5,500,000 X
X = 5,500,000 - 2,550,000
X = $2,950,000

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