1

2
3

5
6

7
What is the break even volume in units and in sales dollars?
Breakeven in units
Total fixed costs
Contributions Margins per unit
Break Even Volume
Break Even Sales Revenue

Market estimates that monthly volume could increase to 3500 units which is well within hoist production capacity
limitations, if the price were cyt 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?

Price
Units
Revenue
Variable Manufacturing Costs
Variable Marketing Costs
Contributions Margins
Manufacturing fixed Costs
Marketing fixed costs
Income
The recommendation would be to not go through with a price cut as it would result in reduction of income
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 uunusually 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 unit.) What impact would
accepting the government contract have on March income?

Sales Revenue
Manufacturing Variable Costs
Marketing Variable Costs
Contributions Margin
Manufacturing fixed costs
Marketing fixed Costs
Income

As seen above, choosing the government contract results in decrease of net income compared to selling the product in the pri

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?

The minimum price per unit should cover the shipping costs, contract obtaining costs per unit and the manufacturing variable
$ 2,227.00

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?
The minimum price should be $275 which is the variable marketing costs. This can be the price obtained by selling these produ
A proposal is received from an outside contractor who will make 1,000 hydraulic hoist units per month and shop them
directly to Hospital Supply's customers as orders are received from Hospital Supply's sales force. Hopsital Supply's fixed
marketing costs would be unaffected, but its variable marketing costs would be cut by 20% (to $220 per unit) for these
1,000 units produced by the contractor. Hospital Supply's plant would operate at two-thirds of its normal level and total
fixed manufacturing costs would be cut by 30% (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?

Particulars
Total revenue
Variable manufacturing costs
Variable marketing costs
Contributed Margins
Total fixed manufacturing costs
Total fixed marketing costs
Payment to contractor
Income

The income received from the sub contracting should be equal in order for the company to make profit
4994000-X=2550000
X=
The maximum amount that can be paid to the contractor is $2,444,000 which is $2,444 per unit as the equivalent in house
cost will be $2,444 per unit
But the price quoted is $2,475
This will result in reduction of income by (2475-2444)*1000
which amounts to $31,000
Therefore this contract should not be considered.

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?

Particulars

Revenue

Manufacturing variable costs

Marketing variable costs
Contribution Margin
Fixed Manufacturing Costs
Fixed marketing costs
Payment to contractor
Income

The income received from the sub contracting should be equal in order for the company to make profit
5500000-X=2550000
X=
The maximum amount that can be paid to the contractor is $2,950,000 which is $2,950 per unit as the equivalent in house
cost will be $2,950 per unit
But the contractor is willing to sell it as $2,475 per unit which is cheaper compared to making the 1,000 units in-house
Therefore the contract can be considered.
The amount saved will be equal to (2950-2475)*1000 = 475000
 Variable marketing costs is also known as selling and general expenses

= total fixed costs divided by contribution margins per unit

= $ 4,290,000.00
= $ 2,280.00
= 1882
= 8186700

Before After
$ 4,350.00 $ 3,850.00
3000 3500
$ 13,050,000.00 $ 13,475,000.00
$ -5,385,000.00 $ -6,282,500.00
$ -825,000.00 $ -962,500.00
$ 6,840,000.00 $ 6,230,000.00
$ -1,980,000.00 $ -1,980,000.00
$ -2,310,000.00 $ -2,310,000.00
$ 2,550,000.00 $ 1,940,000.00
 Without Government Sales With Government Sales
Regular Sales (3500)

$ 17,400,000.00 $ 15,225,000.00
$ -7,180,000.00 $ -6,282,500.00
$ -1,100,000.00 $ -962,500.00
$ 9,120,000.00 $ 7,980,000.00
$ -1,980,000.00
$ -2,310,000.00
$ 4,830,000.00

oduct in the private market

2205

turing variable cost per unit

per unit

ng these products rather than throwing them away.

All production in-house
$ 13,050,000.00
$ -5,385,000.00
$ -825,000.00
$ 6,840,000.00
$ -1,980,000.00
$ -2,310,000.00
$ -
$ 2,550,000.00
$ 2,444,000.00
3,000 Regular hoists produced
in-house Regular in house 2000 units
$ 13,050,000.00 $
$ -5,385,000.00 $
1,000 units contracted
$ 13,050,000.00
$ -3,590,000.00
$ -770,000.00
$ 8,690,000.00
$ -1,386,000.00
$ -2,310,000.00
$4,994,000 - $X
Regular in house (2000
8,700,000.00
-3,590,000.00
$ -825,000.00 $ -550,000.00
$ 6,840,000.00 $ 4,560,000.00
$ -1,980,000.00
$ -2,310,000.00
$ - $ -
$ 2,550,000.00

$ 2,950,000.00
 269040

and general expenses

Change
$ -500.00
500
$ 425,000.00
$ -897,500.00
$ -137,500.00
$ -610,000.00
$ -
$ -
$ -610,000.00
With Government Sales
Government Sales (500)

$ 1,420,000.00
$ -897,500.00
-
$ 522,500.00
Comments

(only cost of the 2000 units produced inhouse to be considered)

(given in the question)

Regular in house (2000) + contract (1000) + modified (800)

Contract of regular hoists for 1,000 units

$ 4,350,000.00
$ -220,000.00
$ 4,130,000.00

(X)
No of units = 3000
CPM = 4350

Keep fixed costs constant

Keep fixed costs constant
Regular (500) Difference Total Gov Help

2175000 $ 755,000.00 $ 16,645,000.00

$ -897,500.00 $ - $ -7,180,000.00
#VALUE! $ -962,500.00
$ 1,277,500.00 $ 755,000.00 $ 8,502,500.00
$ -1,980,000.00
$ -2,310,000.00
$ 4,212,500.00

1140000
 Difference

$ -1,795,000.00
$ -55,000.00

$ -594,000.00

$ -2,444,000.00

800)
Modified 800 produced in house Total Difference

$ 3,960,000.00 $ 17,010,000.00 $ 3,960,000.00

$ -2,420,000.00 $ -6,010,000.00 $ 625,000.00

$ -440,000.00 $ -1,210,000.00 $ 385,000.00
$ 1,100,000.00 $ 9,790,000.00
$ -1,980,000.00
$ -2,310,000.00
$ - (X)
$5,500,000 - X $ 2,950,000.00
Variable Costs 2070 CM
 Reason
for 0.125
is that the
fixed cost
will be
covered
partially
by the
units
897500 1045 produced
for the
governme
nt
contract.
To be
more
specific
500/4000
=(500*1795)+(1980000*0.125)+275000 = 0.125
Regular sale price = $4,350 Modified sale price = $4,950

Regular manufacturing variable costs =

550+852+420 = 1795 per unit Modified variable manufacturing costs = 3025 per unit
Regular marketing variable costs = 275
per unit. Contracted unit marketing
variable cost = 220 per unit Modified variable manrketing cost = 550 per unit
= CPM-TVC