Question

Medicalco makes ventilators. In answering the question below, assume that the offer is “all or nothing”— if Medicalco accepts the offer, it must accept the whole offer (and possibly give up part of its usual sales). (Note: IRL, ventilators costs thousands of dollars each.)

Ventilators (Monthly)                      

Current Volume                                                 788                                       

Capacity                                                              945                                       

Sales Price                                                           $132.50                               

Variable Costs                                                    $63.95                                  

Monthly Fixed Costs                                        $30,200                

              

Hospitalco would like to order 346 ventilators and pay $72.50 per ventilator. Delivery costs (a variable cost) would be reduced by $8.57 per unit for this order because Medicalco is next door to Hospitalco. In addition, due to this large order, Medicalco will be able to reduce its advertising budget (a fixed cost) by $2,456 per month.

1. Using the four-step and comparative CFISes methods, should Medicalco take the order?
2. What are some qualitative factors that should be considered in this situation?

Answer 1

A.
	Option A	Option B
	Accept the offer	Reject the offer
	Usual	Additional	Total	Usual
Units	599	346	945	788
Selling Price	132.5	72.5		132.5
Revenue	79367.5	25085	104452.5	104410
Variable cost per unit	63.95	55.38		63.95
Total variable cost	38306.05	19161.48	57467.53	50392.6
Total contribution	41061.45	5923.52	46984.97	54017.4
Less: Fixed cost			27744	30200
Profit			$19240.97	$23817.4

Decrease in profit = 23817.4-19240.97= 4576.43

As we can see from the calculation above, there is a decrease in profit due to acceptance of offer, hence, Medicalco should not accept the offer.

B. Some qualitative factors that should be considered in this situation are:
(a). If there are chances of any other non-economic benefit from Hospitalco which is beneficial for the Medicalco in the long run, then there can be a change in decision.
(b). The impact of special order and charging of low price on existing customer should also be kept in consideration.
(c). If accepting of special order leads to regular orders in future, then the decision can be reconsidered.
(d). Requirement of product customisation should also be a qualitative deciding factor.