Answers:

1. Statement of the Problem

1.1. How can the Company maximize income by understanding cost behavior and conducting cost
volume profit analysis?

2. Case Facts

GENERAL CASE FACTS

Nominal SELLING Unit Manufacturing Cost Variable materials 550
Capacity of PRICE PER Variable Labor 825
3,000 Units UNIT
4,350.00 Variable overhead 420
Fixed overhead 660
Total Unit Manufacturing 2455
Cost
Unit Marketing Cost Variable 275
Fixed 770
Total Unit Marketing Cost 1045
Total Unit Cost 3500

SCENARIO 2 - CASE FACTS

Plant output of SELLING Unit Manufacturing Cost Variable materials 550
3,500 Units PRICE PER Variable Labor 825
UNIT
3,850.00 Variable overhead 420
(from 3,000 Fixed overhead 660
units) (from 4,350.00) Total Unit Manufacturing 2455
Cost
Unit Marketing Cost Variable Marketing 275
Fixed Marketing 770
Total Unit Marketing Cost 1045
Total Unit Cost 3500

SCENARIO 3 - CASE FACTS

 Plant output of SELLING Unit Manufacturing Cost Variable materials 550
4,000 units. PRICE PER Variable Labor 825
UNIT
(from 3,000 4,350.00 Variable overhead 420
units) New Fixed overhead 495
Old Fixed overhead (420)
Total Unit Manufacturing 2290
Cost
(500 units FIXED Unit Marketing Cost Variable 275
contracted by CONTRACT New Fixed 578
government) PRICE OF Marketing (770)
275,000.00 Old Fixed Marketing
Total Unit Marketing Cost 853
Total Unit Cost 3143

SCENARIO 4 - CASE FACTS

UNIT ORDER 1,000

SHIPPING COST 410
MARKETING COST 22,000
Variable materials 550
Varialble Labor 825
Variable overhead 420

SCENARIO 5 - CASE FACTS

Inventory stock of old units 200 units

SCENARIO 6 - CASE FACTS

UNIT ORDER 1,000

New fixed manufacturing cost 1,386,000
Old fixed manufacturing Cost (1,980,000)
Variable materials 550
Variable labor 825
Variable overhead 420
New variable marketing cost 220
Old variable marketing cost 275

SCENARIO 7 - CASE FACTS

 Original Modified
Hoist Hoist
Plant output of Variable materials 550
3,800 units. Varialble Labor 825 3025
(from 3,000 units) Unit Manufacturing Cost
SELLING PRICE Variable overhead 420
PER UNIT 660
1,000 units for 4,350.00 Fixed overhead
contract Total Unit Manufacturing
Cost 2455
Variable 275 550
Unit Marketing Cost 770
(800 units Selling price of Fixed
modified) 4,950.00
Total Unit Marketing Cost 1045
Total Unit Cost 3500

3. Analyses of the Case Facts

3.1. What is the break-even volume in units? In sales dollars?

Total Fixed Cost = fixed cost per unit x normal volume

= ($660 + $700) x 3000

= $ 4, 290,000.00

Contribution Margin per Unit = Unit Price – Unit Variable Costs

= $4,350.00 - $ 2, 070.00
= $ 2, 280.00

Break-even Volume = Total Fixed Cost / Contribution Margin per Unit

= $ 4, 290,000.00 / $2,280.00
= 1,882 units

Break-Even Sales = Break-even Volume x Unit Price

= 1,882 units x $ 4,350.00
= $ 8,186,700.00

Recommendation: The computation above shows the break-even volume in units and sales in
dollars of Hospital Supply, Inc., having the normal volume of 3,000 units. Therefore, the company
must focus on the profit region which should be above the break-even volume of 1,882 units to be
profitable.

3.2. What would be the impact on monthly sales, costs, and income?
 Regular Income New Income with
with 3,000 units 3,500 increases in Difference
volumes
Price $ 4,350.00 $ 3,850.00 $ (500.00)
Quantity 3,000.00 3,500.00 500.00
Revenue $ 13,050,000.00 $ 13,475,000.00 425,000.00
Variable Cost (6,210,000.00) (7,245,000.00) (1,035,000.00)
Fixed Costs (4,290,000.00) (4,290,000.00) 0.00
Net Income $ 2,550,000.00 $ 1,940,000.00 $ (610,000.00)

Recommendation: Based on the market research, the monthly volume increases having an
additional 500 units and the price decreases to $500.00 per unit. Having the computation, it shows a
negative income amounting to $610,000.00. Other than the price decrease, the variable
manufacturing/marketing cost was also affected. One of the reasons that may cause the change of price
other than the level of volume is the price input factors change; maybe either of the wage rates, salaries, or
material cost. Therefore, we recommend that the market research may take into consideration the
internal and external factors (eg. economic, environment, operational) once the volume increases
before implementing the price decrease.

3.3. What impact would accepting the government contract have on March income?

Regular (3,500 Gov’t Contract

Total Difference
Without Contract units) (500 units)
(D = B + C) (E = D - A)
(A) (B) (C)
Sales $ 17,400,000.00 $ 15,225,000.00 $ 1,420,000.00 $ 16,645,000.00 $ (755,000.00)
Variable
Manufacturing Cost (7,180,000.00) (6,282,500.00) (897,500.00) (7,180,000.00) 0.00
Fixed
Manufacturing Cost (1,980,000.00) (1,732,500.00) (247,500.00) (1,980,000.00) 0.00
Gross Profit 8,240,000.00 7,210,000.00 275,000.00 7,485,000.00 (755,000.00)
Variable Marketing
Costs (1,100,000.00) (962,500.00) 0.00 (962,500.00) 137,500.00
Fixed Marketing
Costs (2,310,000.00) (2,021,250.00) (288,750.00) (2,310,000.00) 0.00
Net Income $ 4,830,000.00 $ 4,226,250.00 $ (13,750.00) $ 4,212,500.00 $ (617,500.00)

Recommendation: As stated above, the company will incur a loss amounting to $ 617,500.00, if
they accept the offer from the federal government of supplying 500 units to Veterans Administration
Hospital. The reason why they must reject the offer is that;

 They will lose the regular 500 units on their monthly capacity limitation due to the rush
order of the federal government of 500 units;
 There are no variable marketing costs but reimburse the government share of March
production costs plus a fixed fee.
 A difference in net income of $ 617,500.00 from their regular monthly net income.

3.4. What is the minimum unit price Hospital Supply should consider for this order of 1,000 units?
Fixed Cost (TFC) = $22,000.00
Breakeven in Units (X) = 1,000 units
Variable Manufacturing Cost (UVC) = $1,795.00 +$410
= $ 2,205.00

UP = (UVC* X) + TFC
X
=( $2,205.00 x 1000)+ $22,000.00
1,000 units
= $2,227,000.00
10000
= $2,227 per unit

Recommendation: As computed the minimum price offer is $ 2,227 per unit for 1000 units order
from the foreign market. On regular operation, the price per unit is $ 4,350.00, which the
differential cost won’t suffice to cover the loss. Even so, on days when domestic market is low, the
management may use the “high-low method” in order to dispose all units produced in a month.

3.5. What is the minimum price that would be acceptable in selling these units?

Minimum Price = Variable Marketing Cost

= $275.00 per unit

Recommendation:

3.6. 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?

Difference in Fixed Manufacturing Cost per Unit 594

Difference in Variable Marketing Cost per Unit 55
Variable Cost per Unit 1,795
Maximum Selling Price 2,444

Recommendation: The company should accept the proposal from the outside contract offering
$2,475.00 per unit which is $31.00 greater than the minimum selling price.

3.7. 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?

Regular (2,000 ContractModified (800

Regular units) (1,000 units) units) Total Difference
(A) (B) (C) (D) (E = B + C + D) (E = D - A)
$ $
Sales 13,050,000.00 $ 8,700,000.00 $ 4,350,000.00 $ 3,960,000.00 17,010,000.00 $ 3,960,000.00
Variable
Manufacturing
Cost (5,385,000.00) (3,590,000.00) 0.00 (2,420,000.00) (6,010,000.00) (625,000.00)
Fixed
Manufacturing
Cost (1,980,000.00) (1,320,000.00) 0.00 (660,000.00) (1,980,000.00) 0.00
Gross Profit $ 5,685,000.00 $ 3,790,000.00 $ 4,350,000.00 $ 880,000.00 $ 9,020,000.00 $ 3,335,000.00
Variable
Marketing
Costs (825,000.00) (550,000.00) (220,000.00) (440,000.00) (1,210,000.00) (385,000.00)
Fixed
Marketing
Costs (2,310,000.00) (1,540,000.00) 0.00 (770,000.00) (2,310,000.00) 0.00
Net Income $ 2,550,000.00 $ 1,700,000.00 $ 4,130,000.00 $ (330,000.00) $ 5,500,000.00 $ 2,950,000.00

Recommendation: The company should accept the proposal from the outside contractor offering
$2,475.00 per unit to gain more profit at a maximum payment of $2,950,000.00, regardless of increase in
volume and modified item, other cost such as price, marketing/manufacturing cost also increases resulting
to increase in profit as well.

4. Recommendation

We recommended that the company proceed with acceptance of various offers including foreign
market expansion. (If they put in place safeguard on whatever contract agreement they made to enter).

4.1. Proceed with the acceptance of offers.

4.2. Embark on the foreign expansion by using the external manufacturer provider.
4.3. Reduction of manufacturing cost thru the contractualization of hospital equipment sold both
domestic and foreign market.
4.4. Enter the foreign market.
4.5. Sell the obsolete products.
4.6. Accept the outside contractor’s proposal and produce modified hoists.