Case 16-1 Hospital Supply Inc.

Case 16-1: Hospital Supply Inc.

Questions:

1. What is the break-even volume in units? In sales dollars?

By utilizing the break-even formulas provided in class, the following can be calculated:

Break-even volume in units = Total Fixed Cost / Unit Contribution Margin

= 4,290,000 / 2280

= approximately 1882 units

Break-even price in sales dollars = Break-even volume*Unit Price

= 1882*4350

= $8,186,700.00

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?

Assuming that the cost behavior patterns implied by the data in Exhibit 1 are correct, it is NOT recommended that Hospital Supply, Inc. follow this market research to increase monthly volume while decreasing unit price. By analyzing the data sheet provided on the page labeled “16-1 Hospital Supply, Inc. Question 2,” the decision to reject this course of action is self-evident. This simultaneous increase in units produced and price reduction cause the break-even volume to increases from 1882 units to 2812 units. This net change would require the firm to produce 930 more units to break even than would be required using the current pricing model. While this new pricing model would result in a net increase in total sales of $425,000, the net increase in variable ($1,035,000) cost would outweigh the extra sales. Additionally, by taking this action, Hospital Supply. would suffer a reduction in net income of approximately $610,000. Presented with this evidence, increasing the sales price to $3,850/unit to accommodate 500 extra unit sales would not be advisable.

3. On March 1, a contract offer is made to Hospital Supply by the federal government to supply 500...