Background Hospital Supply, Inc., produced hydraulic hoists that were used by hospitals to move bedridden patients.

The costs of manufacturing and marketing hydraulic hoists at the companys normal volume of 3,000 units are shown below:

Questions Unless otherwise stated, assume there is no connection between the situations described in the questions; treat each independently. Unless otherwise stated, assume a regular selling price of $4,350 per unit. 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 above are correct, would you recommend that this action be taken? What would be the impact on monthly sales, costs, and income? 3. 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 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 customers would be lost to a competitor. The contract given by the governments share of March production costs, plus pay a fixed fee (profit) of $275,000. (There would be no variable marketing costs incurred on the governments units.) What impact would accepting the government contract have on March income? 4. 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? 5. 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? 6. A proposal is received from an outside contractor who will make 1,000 hydraulic hoist units per month and ship them directly to Hospital Supplys customers as orders are received from Hospital Supplys sales force. Hospital Supplys 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 Supplys plant would operate at two-thirds of its normal level, and total fixed manufacturing costs would be cut by 30 percent (to $1,386,000). What inhouse unit costs 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? 7. Assume the same facts as above in Question 6 except that idle facilities would be used to produce 800 modified hydraulic hoists per month for use in hospital operating rooms. Theses 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? Statement of the Problem How can Hospital Supply maximize profit in each scenario? Is the federal government contract a good opportunity for the company to increase profit? Will expanding to the foreign market increase Hospital Supplys profit? Will the company profit or loss in selling the obsolete inventory at a lower price? Should Hospital Supply outsource some of its production? Objectives To determine the optimum volume of production to achieve maximum profit To identify alternative courses of action that will maximize profit and minimize losses for Hospital Supply Inc.

 To determine if the following actions will benefit the company:: Lower Selling Price Increase Sales Optimize production Reduce overhead cost without sacrificing quality Accept government contract Maintain production levels Maximize income by outsourcing part of production Areas of Consideration 1. Evaluate the pros and cons of the various scenarios. 2. Ascertain the financial benefit and duration of a favorable scenario. Case Analysis Proper CASE REPORT 16-1 1.

Using the break-even point analysis, one can determine the volume in units and the sales dollars where the necessary costs will be covered. Any excess in the break-even point is the amount of profit earned by the Hospital Supply, Inc. In the said company, the BEP in volume is 1882 units and the BEP in sales dollars is $8,184,868.42. 2. Increase in Variable Cost = 500 units * $ 2,070 =$1,035,000

**Increase in Variable Cost, Decrease in Income

Decrease in Selling Price Old : 3000 units * $4350 = $13,050,000 New: 3500 units * $3850 = 13,475,000 Increase in Income $ 425,000 Change in Selling Price = $425,000 Change in Variable Cost = (1,035,000) Net decrease in income $610,000 I would not recommend this action because it is not beneficial to Hospital Supply, Inc. A 500 sales volume increase would have direct effect to its sales and variable costs based on its selling price and variable cost, respectively. On the other hand, a decrease in selling price only affects the sales and income. In this problem, an increase in sales volume and decrease in selling price will result to increase in income amounting to $425,000. Also, an increase in volume has resulting increase to costs amounting to $1,035,000 having decreasing effect to income. Thus, there will be net decrease in income amounting to $610,000.

3. Opportunity Loss (500 units * $2280) = $1,140,000 Reimbursed Government Share (275,000) Fixed Overhead ($1,980,000 * 500/4000) (247500) Impact on Income $617,500 There will be $617,500 impact on income when the government contract will be accepted. Upon acceptance of the offer, there will be 500 units ordered by regular customers that wont be catered. Thus, the fixed overhead costs in relation to the 500 orders will be eliminated. At the same time, production costs will be subsidized by providing $275,000. 4. Shipping cost Marketing Cost ($22,000/1000) Variable Materials Variable Labor Variable Overhead Minimum Price $410/unit 22 550 825 420 $2,227/unit

The minimum price of $2,227/unit should be considered to the 1000 units order from the foreign market. Only the variable cost should be considered in determining the minimum price because

only the idle production was affected thereby it only maximizes the resources of Hospital Supply, Inc.

5. Minimum Price = $275 (variable marketing cost) In an obsolete model of hoist, only the variable marketing cost will be considered in its pricing because only this costs will be incurred for its disposal. 6. If you ACCEPT the proposal, the proposed income would be: Sales ($4350 * 3000 units) Variable Manufacturing Materials (550*2000) Labor (825 *2000) Overhead (420 * 2000) Variable Marketing (275*2000 units) (220*1000 units) Contribution Margin Fixed Overhead Fixed Marketing (770 *3000) Contractors fee Net Income If you DO NOT ACCEPT the proposal: $550,000 220,000 (770,000) $8,690,000 (1,386,000) (2,310,000) (2,475,000) $2,519,000 $1,100,000 1,650,000 840,000 (3,590,000) $13,050,000

Contribution Margin Fixed Overhead

($2280* 3000 units) (660 *3000)

$6,840,000 (1,980,000)

Fixed Marketing Net Income

(770*3000)

(2,310,000) $2,550,000

Net difference of 31,000. The proposal should not be accepted. There would be a decrease of 31,000 on net income. SWOT Analysis Strengths Weaknesses Manufacturing output is at its maximum. Unusually large rush orders from customers are pushing in producing at full capacity. Opportunities Both domestic and foreign market demand are still high. Threats Lack of investment with their R&D (Research and Development) for product development. The possibility that their external manufacturer might enter the market (re: manufacturing contract agreement) Conclusion/Recommendation The company can proceed with the acceptance of the various offers made to them including foreign market expansion. However, they should keep in mind that they should be wary of any contract they enter into. They can reduce manufacturing cost by contracting hospital equipment manufactured and sold both domestically and in the foreign market.