1) What is the breakeven volume in units? In sales dollars?

Breakeven Point = Total Fixed Costs

Contibution Margin per unit

= 3,000 u ($660 + $770)

($4,350 - 1,795 - 275)

= 4,290,000.00
2,280.00

= 1882 units

Breakeven Sales = Total Fixed Costs Breakeven Sales =

Contibution Margin (%)

= 3,000 u ($660 + $770) =

($4,350 - 1,795 - 275)/ $4,350
OR
= 4,290,000.00
0.524137931

= ### =
Breakeven Point x Selling Price

1,882 units x $4,350

$ 8,184,868.42
2) Market research estimates that monthly volume could increase to 3,500 units, which is well within hoist prod
$3,850 per unit. Assuming the cost behavior patterns implied by the data in Exhibit 1 are correct, would you
impact on monthly sales, costs and income?

New Selling Price = $ 3,850.00

New CM = ($3,850 - 1,795 - 275) =
New CM % = $1,780 / 3,850 =
Total Fixed Cost = $ 4,290,000.00

@ 3,500 units @3,000 units

Sales 13,475,000.00 13,050,000.00
Variable Costs 7,245,000.00 6,210,000.00
Contribution Margin 6,230,000.00 46.23% 6,840,000.00 52.41%
Fixed Costs 4,290,000.00 4,290,000.00
Net Income 1,940,000.00 2,550,000.00

Degree of Operating Leverage = Contribution Margin / Net Income

DOL = 6,230,000.00 6,840,000.00

1,940,000.00 2,550,000.00

= 3.21 2.68

Degree of Operating Leverage = %change in EBIT / %chane in Sales

= 0.03
(0.24)

= (0.14)
nits, which is well within hoist production capacity limitations, if the price were cut from $4,350 to
in Exhibit 1 are correct, would you recommend that this action be taken? What would be the

$ 1,780.00
46.23%
Recommendation: Hospital Supply, Inc should retain it's
price and it's current sales volume. looking into the impact
of the research, if HSI will proceed its actions based on
market research, it will incur loss of $610,000.
Increase (Decrease) Also, if the market research will take place, the
425,000.00 leverage of the company's operations would also be
1,035,000.00 impaired because of the decrease in price, considering
other costs' behavior will be constant.
(610,000.00)
-
(610,000.00)
3)
1.    On March 1 a contract offer is made to Hospital Supply by the federal government to supply 500 units to
unusually large number of rush orders from their regular customers, Hospital Supply plans to produce 4,000
order is accepted, 500 units normally sold to regular customers would be lost to a competitor. The contract
production costs, plus pay a fixed fee (profit) of $275,000. (There would be no variable marketing costs incu
contract have on March income?

@ 3,500 units - RC
@ 4,000 units Increase (Decrease)
@500 units - FG

Sales - Regular Customers 15,225,000.00 17,400,000.00 (2,175,000.00)

a
Sales - Federal Government 1,420,000.00 - 1,420,000.00
Total Sales 16,645,000.00 17,400,000.00 (755,000.00)
Variable Costs - RC 7,245,000.00 8,280,000.00 (1,035,000.00)
Variable Costs - FG 897,500.00 897,500.00
Total Variable Costs 8,142,500.00 8,280,000.00 (137,500.00)
Contribution Margin 8,502,500.00 9,120,000.00 (617,500.00)
Fixed Costs 4,290,000.00 4,290,000.00 -
Operating Income 4,212,500.00 4,830,000.00 (617,500.00)

Degree of Operating Leverage = Contribution Margin / Net Income

DOL = 8,502,500.00 9,120,000.00

4,212,500.00 4,830,000.00

= 2.02 1.89

Degree of Operating Leverage = %change in EBIT / %chane in Sales

= (0.15)
(0.05)

= 3.23
 ent to supply 500 units to Veterans Administration hospitals for delivery by March 31. Because of an
ply plans to produce 4,000 units during March, which will use all available capacity. If the government
competitor. The contract given by the government would reimburse the government’s share of March
riable marketing costs incurred on the government’s units.) what impact would accepting the government

a
Variable costs
Materials 550
Labor 825
Overhead 420
b b
Fixed OH/unit 495 $660 @ 3,000 1,980,000.00
$ 2,290.00 / 4,000
x 500 u 495
$ 1,145,000.00
+ $ 275,000.00 fixed profit
$ 1,420,000.00

Recommendation: Hospital Supply, Inc should retain it's sales to its

current regular customers. Looking into the impact of the research, if
HSI will proceed its actions based on market research, it will incur loss
of $617,500. further to that, if in case the contract between HSI and
the government lapsed, a greater loss will be suffered by HSI due to
that the supposed to be regular customers will shift to the competitor
of HSI.

Looking into the leverage, if the sale to FG will be pushed

through, for every $1 loss of sale, 3.23 times HSI will incur losses.
4) Hospital Supply has an opportunity to enter a foreign market in which price competition is keen. An attractio
that demand there is greatest when demand in the domestic market is quite low; thus, idle production facili
affecting domestic business. An order for 1,000 units is being sought at a below normal price in order to ent
costs for this order will amount to $410 per unit, while total costs of obtaining the contract (marketing costs
business would be unaffected by this order. What is the minimum unit price Hospital Supply should consider

Current Production 3,000.00

Total Capacity 4,000.00
Idle capacity 1,000.00

1) Total Mfg Variable Costs 1,795.00

Mktg Variable Cost 275.00
Shipping VC 410.00
2,480.00
Incremental Mktg Cost per U 22.00 (22,000/1000 units)
Minimum unit price $ 2,502.00

if HIS would want to generate a minimum profit of $100,000,

Unit Cost 2,502.00

Desired Profit per unit 100.00 (100,000 / 1,000)
Price per unit 2,602.00
mpetition is keen. An attraction of the foreign market is
w; thus, idle production facilities could be used without
normal price in order to enter this market. Shipping
he contract (marketing costs) will be $22,000. Domestic
pital 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 th
the reduced prices or the inventory will soon be valueless. What Is the minimum price that would be accept

Minimum Price = TVC /u

Variable Materials 550
Variable Labor 825
Variable OH 420
Variable Mktg Cost 275
$ 2,070.00
These must be sold through regular channels at
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 s
orders are received from Hospital Supply’s sales force. Hospital Supply’s fixed marketing costs would be una
cut by 20 percent (to $220 per unit) for these 1,000 units produced by the contractor. Hospital Supply’s plan
and total fixed manufacturing costs would be cut by 30 percent (to $1,386,000). What in-house unit cost sh
received from the supplier? Should the proposal be accepted for a price (ie., payment to the contractor) of $

Make Buy

Mfg VC 1,795.00 Purchase Price 2,475.00

Mktg VC 275.00 Decrease in Mktg VC (55.00)
$ 2,070.00 2,420.00
x 1,000.00
Total 2,420,000.00
Decrease in FOH (594,000.00)
Net Cost 1,826,000.00
/ 1,000.00
Net Cost per unit $ 1,826.00

Recommendation: Hospital Supply, Inc should consider buying t

Comparing: Make 2,070.00 from outside contractor. Looking into the computation, HSI wou
incremental income of $244 per unit should it opt to purchase it
Buy 1,826.00 Decision would be different if there were no cost cutting on the
Diff $ 244.00 fixed costs.

Supposing that there would be no cutoff of 30% on fixed co

relevant costs were only $2,420, which is higher compared to in
cost of $2,070.
t units per month and ship them directly to Hospital Supply’s customers as
ing costs would be unaffected, but its variable marketing costs would be
. Hospital Supply’s plant would operate at two-thirds of its normal level,
at in-house unit cost should be used to compare with the quotation
t to the contractor) of $2,475 per unit?

(275 - 220)

units

(1,980,000 - 1,386,000)

units

c should consider buying the hoist

he computation, HSI woul generate
hould it opt to purchase it outside.
ere no cost cutting on the part of

o cutoff of 30% on fixed cost,

h is higher compared to in-house
7) Assume the same facts as above in Question 6 except that the idle facilities would be used to produce 800
use in hospital operating rooms. These modified hoists could be sold for $4,950 each, while the variable ma
unit. Variable marketing costs would be $550 per unit. Fixed marketing and manufacturing costs would be u
regular hoists were manufactured or the mix of 2,000 regular hoists plus 800 modified hoists was produced.
per unit that Hospital Supply should be willing to pay the outside contractor? Should the proposal be accepte
contractor?

OPTION 1 OPTION 2
Make 3,000 units Buy 1,000 units

Selling Price $ 4,350.00 Selling Price

Mfg VC 1,795.00 Purchase Price
Mktg VC 275.00 CM
TVC $ 2,070.00 Maximum Purchase price
CM $ 2,280.00 Make 2,000 units

Selling Price
Purchase Price
CM

Make 800 units

Comparing: Make $ 2,280.00
Make & Buy 1,982.89 Selling Price
Diff $ 297.11 Purchase Price
CM
be used to produce 800 modified hydraulic hoists per month for
h, while the variable manufacturing costs would be $3,025 per
cturing costs would be unchanged whether the original 3,000
ed hoists was produced. What is the maximum purchase price
d the proposal be accepted for a price of $2,475 per unit to the

Recommendation: Hospital Supply, Inc should not consider buying the hoist
4,350.00 from outside contractor. Looking into the computation, HSI would generate
2,475.00 income of $297.11 per unit higher should it opt to manufacture and sell
3,000 units of hoist to its regular customers than manufacturing 2,000
1,875.00 regular hoist and 800 modified hoist, and purchasing additional 1,000 hoist

4,350.00
2,070.00 Weighted CM = (1,875 *1,000) + (2,280 *2,000) + (1,375 *800)
2,280.00 3,800

= 7,535,000.00
3,800
4,950.00
3,575.00 Weighted CM = 1,982.89
1,375.00