Case 16-1

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?

*
Copyright © by Michael W. Maher, University of California, Davis.
Accounting Text and Cases, 13th Edition
Robert N. Anthony, David F. Hawkins, Kenneth A. Merchant