Hospital Supply

In: Business and Management

Submitted By fshiew
Words 944
Pages 4
GSM5301
Accounting for Decision Making
GROUP ASSIGNMENT
(CASE 16-1 HOSPITAL SUPPLY, INC)

Question 1
What is the break-even volume in units? In sales dollars?
Solution 1
Variable costs per unit = $550 + $825 + $420 + $275 = $2,070
Fixed costs per unit = $660 + $770 = $1,430
Normal volume = 3,000 units
Regular selling price = $4,350

Total fixed cost = 3,000 units x $1,430/unit = $4,290,000

Unit contribution = price/unit – variable cost/unit = $4,350 - $2,070 = $2,280

Contribution percent = $2,280/$4,350 = 0.524

Break-even volume in units = fixed cost / unit contribution = $4,290,000 / $2,280 = 1,882 units

Break-even volume in sales = fixed cost / contribution percent = $4,290,000 / $0.524 = $8,184,867
Question 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 in Exhibit 1 are correct, would you recommend that this action be taken? What would be the impact on monthly sales, costs and income?
Solution 2 Regular price With price reduction Difference

Quantity (Q) 3,000 3,500 500
Price (P) 4,350 3,850 -500
Revenue $ (P x Q) 13,050,000 13,475,000 425,000
Fixed costs (FC) 4,290,000 4,290,000 0
Variable costs (VC) 6,210,000 7,245,000 1,035,000
Total costs (FC+VC) 10,500,000 11,535,000
Income (with regular price) = Revenue - Total costs = $13,050,000 - $10,500,000 = $2,550,000

Income (after price reduction) = $13,475,000 - $11,535,000 = $1,940,000

From the analysis above, reduction in price resulted in decreasing of income ($1,940,000 - $2,550,000 = $610,000). Thus, we would not recommend this measure to take effect even though price reduction has its…...

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