JEANNE P.

MADRONA ID no: 11184523 ACC510M GRC

HOSPITAL SUPPLY INC. Page 1

1. TC =Total Cost TR = Total Revenue SP= Selling Price VC =Variable Cost/unit FC =Fixed Cost x = Break Even Volume TC =TR FC+VCx = SPx [($660 + $770) * 3,000 ] + [($550+$825+$420+$275)x] = $4,350x [$1,430 * 3,000 ] + $2,070x = $4,350x $4,290,000 = $4,350x - $2,070x $4,290,000 = $2,280x $4,290,000 / $2,280 = x 1,882 units= x Break Even Sales = SPx Break Even Sales = $4,350 * 1,882 Break Even Sales = $ 8,186,700 2. Units Selling Price Total Sales (SP x Units) Variable Costs (VC x Units) Contribution Margin Fixed Cost Net Income $ Regular 3,000 $4,350 Price reduction 3,500 $3,850 425,000.00 1,035,000 (610,000.00) (610,000.00) Difference

13,050,000.00 $ 13,475,000.00 $ 6,210,000 7,245,000 6,840,000.00 6,230,000.00 4,290,000.00 4,290,000.00 2,550,000.00 $ 1,940,000.00 $

Reduction of sales price and increase in sales volume are not recommended. Variable costs increased more than the sales , resulting to a $610,000 decrease in net income. 3. Lost Contribution Margin from regular customers Reimbursement Pro-rated fixed manufacturing cost (savings) Net decrease in income * Sales (500 x $4,350) Variable Cost (500 x $2,070) Lost Contribution Margin from regular customers
#

(1,140,000) * 275,000 247,500 # (617,500)

$ $

2,175,000 1,035,000 (1,140,000)

Total Fixed Cost at Normal Capacity Divided by units @ full capacity Fixed cost per unit @ full capacity Mutiply be units produced for gov't Pro-rated fixed manufacturing cost

($660*3,000)

$ $ $

1,980,000.00 4,000 495 500 247,500.00

Accepting the governement contract would result to net decrease of net income by $617,500. Contibution margin lost from regular customer is greater that the amount the government will pay and amounting to $275,000 and "saving" (Fixed cost still be incurred regardless at what capacity) $247,500. 4. Variable manufacturing cost per unit Shipping cost per unit Marketing cost per unit ( $22,000 / 1,000) Minimum unit price $1,795 410 22 $2,227

5. All manufacturing costs has already been incurred and cannot be changed regardless of the decision. Hence, this is not considered as differential cost. In this case, the differential cost is only the variable manufacturing cost amounting to $275. Hence, the minimum price that would be acceptable in selling 200 units of an obsolete model of hoists is $275. 6. Differential Cost / unit: Variable manufacturing cost Variable Marketing cost ($275 * 20%) Fixed manufacturing cost Cost at normal capacity ($660*3000) Reduction

$1,795 55 $ 1,980,000 1,386,000

JEANNE P. MADRONA ID no: 11184523 ACC510M GRC

HOSPITAL SUPPLY INC. Page 2

Units produced Fixed manufacturing cost Total in house cost/unit Proposed Purchase price/unit Reduction in Net income/unit

594,000 1,000 594 $2,444 2,475 ($31)

The total cost if the 1,000 units is manufactured is $2,444. Therefore, the $2,475 purchase price from the contractor should not be accepted, since it is costs higher than the differencial cost. If Hospital Supply accepts the proposal net income would be reduced by $31,000.

JEANNE P. MADRONA ID no: 11184523 ACC510M GRC

HOSPITAL SUPPLY INC. Page 3

7 Units Selling Price Total Sales (SP x Units) Variable Costs (VC x Units) Contribution Margin Fixed Cost Net Income $

Regular 3,000 $4,350 13,050,000.00 6,210,000 6,840,000.00 4,290,000.00 2,550,000.00 In house 2,000 $4,350 $1,795 $275 $ 8,700,000 $ 3,590,000 550,000 4,560,000 $ Outside 1,000 $4,350 0 $220 4,350,000 $ 220,000 4,130,000 $ Modified 800 $4,950 $3,025 $550 3,960,000 2,420,000 440,000 1,100,000

Units Selling Price/unit Variable Mfg Costs/unit Variable Mktg Costs/unit Total Sales Variable Mfg Costs Variable Mktg Costs Contribution margin

In house Outside Modified Total Contribution Margin if proposal is accepted Less: Fixed Costs Net income if proposal is accepted Net income @ normal capacity maximum payment from contractor units to be purchased Maximum purchase price/unit

$ $ $ $

4,560,000 4,130,000 1,100,000 9,790,000 4,290,000 5,500,000 2,550,000 2,950,000 1,000 2,950

Proposal to purchase at $2,475/unit should be accepted since it is cheaper than the maximumacceptable payment.