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Hospital Supply, Inc. Hospital Supply Inc.

produces and sells hydraulic hoists that are used by hospitals to move bedridden patients. The costs per unit of manufacturing and selling a hydraulic hoist, at the companys normal volume of 3,000 units per month are as follows: Manufacturing Costs: Direct materials (variable) Direct labour (variable) Variable overhead Fixed overhead Total manufacturing costs per unit Selling Costs: Variable Fixed Total selling costs per unit Total costs per unit $550 825 420 660 $2,455 275 770 $1,045 $3,500

The following situations refer to the preceding data. Unless stated otherwise, there is no connection between the situations. Unless it is stated otherwise, assume the regular selling price is $4,350 per unit. The company produces the same number of units as it sells. Ignore income taxes, and assume that the above data include ALL of the costs. Required: 1. What is the break-even volume in units and in dollars? 2. Market research indicates the unit sales could be increased by 10% above the 3,000 monthly level if the prices were reduced to $3,850 per unit. This volume is within the production capacity. Would you recommend this price change be implemented? 3. On March 1 an offer is made to Hospital Supply by the federal government to supply 500 units to the Veterans Administration hospitals for delivery by March 31. Because of an unusually large number of rush orders from regular customers, the company plans to produce and sell 4,000 units in March, which will use all available production capacity. If this government order is accepted, therefore, 500 units of regular sales will be lost to a competitor. The contract offered by the government would reimburse Hospital Supply for the governments share of March production costs, plus pay a fixed fee of $275,000. There would be no variable marketing costs on the government order. Should this order be accepted? 4. The company has an opportunity to enter a foreign market in which price competition is keen. The company seeks a one-time only special order for 1,000 units. On this order, the company will not incur any variable selling costs, except $410 per unit in shipping. There will be total additional fixed costs of obtaining the order of $22,000. What is the minimum price the company can accept for this order and leave its income unchanged from current levels? What other factors should be considered?

5. The company has an inventory of 200 hoists that must be sold immediately through regular channels, or else be thrown away. What is the minimum acceptable price at which these hoists should be sold? 6. A proposal has been received from a manufacturer who will make and ship 1,000 hoists directly to Hospital Supplys customers, based on orders that HS receives. HSs fixed selling costs would be unchanged, but its variable selling costs would be reduced by 20% for these 1,000 units. HSs factory would operate at two-thirds of its normal volume, and its fixed manufacturing costs will be cut by 30 percent. What is the maximum price per unit that Smith can pay the manufacturer and leave its income unchanged from its current level? 7. Assume the same facts as at point 6 above, except that the idle facilities would be used to produce 800 modified hoists per month for use in hospital operating rooms. These modified hoists would be sold for $4,950 each, while the variable manufacturing costs would be $3,025 per unit. Variable selling costs would be $550 per unit. Fixed manufacturing and selling costs would be unchanged. What is the maximum purchase price per unit that HS would be willing to pay the outside contractor?

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