Question

Hospital Hoist is a supplier of hydraulic hoists for hospital use. These hoists are used a patients has a broken leg that needs to be elevated. The hoists typically sell at a price of €760 and the firm’s normal production and sales volume is 30,000 units/month. The firm uses a standard, full absorption, usage based cost system. Ignore taxes. The firm’s cost information is below.

Unit Manufacturing and Marketing Costs: (€)

Direct Materials 110

Direct Labor 150

Variable Manufacturing Overhead 50

Fixed Manufacturing Overhead 120

Variable Marketing Costs 50

Fixed Marketing Costs 140

A. Find the break-even volume in units (i.e., the volume where profits = 0).

B. Should Hospital Hoist increase monthly production and sales to 35,000 units while decreasing price to €680/unit?

C. The firm has 2300 units of an obsolete model. These must be sold through regular channels (thus incurring the normal variable marketing costs) at reduced prices, or the inventory will be worthless soon. Assume that every two obsolete units sold will displace the sale of one unit of the current model. What is the minimum acceptable price for these units?

D. An outside contractor wants to make and ship 10,000 units/month directly to the firm’s customers, but the customers would continue to pay Hospital Hoist directly. The firm’s variable marketing costs would be reduced by 20% for the 10,000 outsourced units. The firm would produce hoists in-house at 2/3 of its normal level and its total fixed manufacturing costs would be cut by 25%. What is the maximum per unit price that Hospital Hoist would be willing to pay the outside contractor?

E. Same facts as in Part D, but now if Hospital Hoist outsources the production of 10,000 hoists/month, the idle capacity could be used to produce 8000 modified hoists/month that could be sold for €900 each. Variable manufacturing costs would be €550/unit and variable marketing costs would be €100/unit for the modified hoists. Total fixed costs would be same as when 30,000 regular hoists are produced. What is the maximum per unit price that Hospital Hoist would be willing to pay the outside contractor?

Answer 1

1. Total fixed costs = 30000 x (120+140) = 7800000

Contribution p.u. i.e = Sales price - variable costs = 760 - (110+150+50+50) = 400

Therefore , Break evem point = fixed costs / contribution p.u = 7800000/400 = 19500 units

2. refer attached photo

3. to sell 2300 units of old model, one unit of new model will be sacrificed. therefore total contribution sacrificed from new model = 2300 / 2 * 360 = 414000

therefore contribution from old model should be = 414000 / 2300 = 180 p.u.

therefore sale price for old model = 180 + 360 = 540 p.u.

4. Profits = 4,200,000

Fixed costs = 120*.75*30000 + 140*30000 = 6,900,000

Total COntribution = 11,100,000

Total costs incurred in house = 20000*360 + 10000*50*.8 = 7,600,000

Total sales = 30000*760 = 22,800,000

Therefore , maximum payable to contractor = 22800000 - 11100000-7600000 = 4100000

Therefore, maximum price payable to contractor p.u. = 4100000/10000 = 410 p.u.