Question

Hi - I'm looking to find the solution to Question 5, could you please help?

Cases Questions Case 16-1 Hospital Supply, Inc.* Hospital Supply, Inc., produced hydraulic hoists that were used by hospitals to move bedridden patients. * Copyright © by Michael W. Maher, University of California, Davis the costs of manufacturing and marketing hydraulic hoists at the company's normal volume of 3,000 units The following questions refer only to the data given in Exhibit 1. Unless otherwise stated, assume there is no connection between the situations described in the questions; treat each independently. Unless otherwise stated, assume a regular selling price of $4.350 per unit. Ignore income taxes and other costs not men- tioned in Exhibit I or in a question itself. B2 Part 2 Management Accounting (There would be no variable marketing costs in curred on the government's units.) What impact would accepting the government contract have on March income? 4. Hospital Supply has an opportunity to enter a for- eign market in which price competition is keen. An attraction of the foreign market is that demand there is greatest when demand in the domestic market is quite low; thus, idle production facilities could be used without affecting domestic business. An order for 1.000 units is being sought at a below-normal price in order to enter this market. Shipping costs for this order will amount to $410 per unit, while total costs of obtaining the contract (marketing costs) will be $22,000. Domestic business would be unaffected by this order. What is the minimum unit price Hospital 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 through regular channels at reduced prices or the inventory will soon be valueless. What is the minimum price 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 ship them directly to Hospital Supply's customers as orders are received from Hospital Sup- ply's sales force. Hospital Supply's fixed marketing costs would be unaffected, but its variable marketing costs would be cut by 20 percent (to S220 per unit) for these 1,000 units produced by the contractor. EXHIBIT 1 Costs per Unit for Hydraulic Hoists $550 825 420 660 1. What is the break-even volume in units? In sales dollars? 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? 3. On March 1, a contract offer is made to Hospital Supply by the federal government to supply 500 units to Veterans Administration hospitals for deliv- ery by March 31. Because of an unusually large number of rush orders from its regular customers, Hospital Supply plans to produce 4.000 units during March, which will use all available capacity. If the government order is accepted 500 units normally sold to regular customers would be lost to a com- petitor. The contract given by the government would reimburse the government's share of March produc- tion costs, plus pay a fixed fee (profit) of $275,000. Unit manufacturing costs: Variable materials Variable labor Variable overhead Fixed overhead Total unit manufacturing costs Unit marketing costs: Variable Fixed Total unit marketing costs Total unit costs $2,455 1,045 $3,500 The following questions refer only to the data given in Exhibit 1. Unless otherwise stated, assume there is no connection between the situations described in the questions; treat each independently. Unless otherwise stated, assume a regular selling price of $4,350 per unit. Ignore income taxes and other costs not men- tioned in Exhibit I or in a question itself. Hospital Supply's plant would operate at two-thirds of its normal level, and total fixed manufacturing costs would be cut by 30 percent (to $1,386,000). What in-house unit cost should be used to compare with the quotation received from the supplier? Should the proposal be accepted for a price (i.e.. payment to the contractor) of S2,475 per unit? 7. Assume the same facts as above in Question 6 ex- cept that the idle facilities would be used to produce 800 modified hydraulic hoists per month for use in hospital operating rooms. These modified hoists could be sold for $4,950 each, while the variable manufacturing costs would be $3.025 per unit. Vari- able marketing costs would be $550 per unit. Fixed marketing and manufacturing costs would be un- changed whether the original 3,000 regular hoists were manufactured or the mix of 2,000 regular hoists plus 800 modified hoists was produced. What is the maximum purchase price per unit that Hospi- tal Supply should be willing to pay the outside con- tractor? Should the proposal be accepted for a price of S2,475 per unit to the contractor?

Answer 1

Q.No.5

the minimum selling price is the variable selling expenses incurred of  $275 per unit. Only variable selling expenses is relevant in this case since it is being sold through regular marketing channels.

The manufacturing cost already incurred is sunk cost and not relevant cost to fix minimum selling price