Case 16-1

Medicare Supply, Inc.

Medicare 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.

EXHIBIT 1 Costs per Unit for Hydraulic Hoists

Unit Manufacturing Costs:

Variable Materials $550
Variable Labor 825
Variable overhead 420
Fixed overhead 660
Total unit manufacturing costs $2,455
Unit marketing costs:
Variable 275
Fixed 770
Total unit marketing costs 1045
Total unit costs $3500

Questions
The following questions refer only to the data given in Exhibit 1. Unless otherwise stated, assume there
is 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 are correct, would you
recommend that this action be taken? What would be the impact on monthly sales, costs, and
income?
3. Medicare 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 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 Medicare Supply should consider for this order of 1,000 units?