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Hospital Supplies


Hospital Supply Inc

"Hospital supply, Inc., produced
hydraulic hoists that were used by
hospital to move bedridden patients.
The cost of manufacturing and
marketing hydraulic hoists at the
company's normal volume of 3,000
units per month.

EXHIBIT 1- Cost per Unit for

Hydraulic Hoists
Unit manufacturing costs:

Variable materials


Variable labor


Variable overhead


Fixed overhead


Total unit manufacturing costs Unit

marketing costs:



Total unit marketing costs

Total unit costs



Unless otherwise stated, assume a regular selling
price of $4,350 per unit.
Ignore income taxes and other costs.
What is the break-even volume in units? In sales dollars?
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?

On March 1, a contract offer is made to Hospital Supply by
the federal government to supply 500 units of 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 customer 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?

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 effecting
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 cost 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?

An inventory of200 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 what
would be acceptable in selling these units?
A proposal is received from an outside contractor who will make 1,000
hydraulic hoist units per month and ship them directly to Hospital
Supply's customers as orders are received from Hospital Supply's sales
force. Hospital Supply's fixed marketing costs would be unaffected, but
its variable marketing costs would be cut by 20 percent (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 percent (to
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?


Assume the same facts as above in Question 6 except that the idle
facilities would be used to produce 800 modified hydraulic hoist
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 hoist
were manufactured or the mix of 2,000 regular hoist plus 800
modified hoists was produce. 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?
Cash fixed cost = total fixed costs depreciation = $148,960 ($16,000 + $8,000) = $124,960. However, the depreciation tax
shield ($24,000 x 30%) offsets $7,200 of these fixed costs, leaving
$117,760 net cash fixed costs. Break-even volume, on a cash
basis, then, is $117,760 + $5.95 = 19,792 pizzas.

Cash generated by operations equals net income plus non-cash
expenses (here, only depreciation) $46,648 + $24,000 = $70,648,
leaving $56,248 if Calderone withdraws $14,400 for his personal use.
The easiest way to approach this question is to treat the target pretax
income as a fixed cost. Since the target income is $60,000, the target
pretax income is $60,000 70% = $85,713. Adding this to the
$148,960 fixed costs gives a total of $234,673. So the required volume
= $234,673 I $5.95 = 39.441 Pizzas.
Most of the expenses are fixed. Therefore a large volume of sales is
required before any profit is made. Once this point is reached (breakeven), each sale contributes $5.95 to profits, a larger change in profits
since profits begin at zero at this point will be the $8.50 change in sales
is a smaller proportion of sales because of the large amount of sales
required to reach the break-even point.
The cash flow from operations will exceed his profits because $24,000
of the expense (depreciation) is not a current cash-consuming cost.