Hospital Supply Inc. : A quantitative analysis I. Introduction: Hospital Supply,Inc. ,produced hydraulic hoists that were used by hospitals to move bedridden patients. The costs of manufacturing and marketing hydraulic hoists at the company’s normal volume of 3,000 units per month are shown in Exhibit 1. EXHIBIT 1: Cost per unit for hydraulic hoists Unit manufacturing costs: Variable materials$550 Variable labor 825 Variable overhead 420 Fixed overhead 660
Total unit manufacturing costs $2,455 Unit marketing costs: Variable 275 Fixed 770 Total unit marketing costs 1,045 Total unit costs $3,500 II. Statement of the Problem: How can Hospital Supply Inc. maximize its profit given various scenarios? III. Objectives: 1. To be able to determine how much to sell to achieve profit 2. To identify alternative choices that will provide optimal profit for Hospital Supply Inc. or minimize losses IV. Scenarios 1.
Mark down price of hydraulic hoist per unit from $4,350 to $3,850 assuming that the market estimates a monthly volume increase of 3, 500 units per. |ADVANTAGES |DISADVANTAGES | |Lower prices increase consumers demand |Lower prices reduce incomes | |Increase in market share |Reduction in product availability | . Accept government contract |ADVANTAGES |DISADVANTAGES | |Invariable orders |Income difference of $617,500 | |Guaranteed income |Maximization of availability capacity | 3.
Penetrate foreign market |ADVANTAGES |DISADVANTAGES | |Opportunity for wider market share |Shipping costs may vary from time to time | |Increase in sales for there is a chance for higher foreign demand|Shortage in local supplies | |even there is a ecrease in local demand | | 4. Sell obsolete units in acceptable selling prices |ADVANTAGES |DISADVANTAGES | |Additional income |Difficult to sell | 5. Accept third party contractor in producing 1000 hydraulic hoist units per month for $2,475/unit ADVANTAGES |DISADVANTAGES | |Increase in supplies |Decrease income by $31,000 | |Reduce in marketing and manufacturing costs |Contractor costs is expensive than in-house costs | 6. Accept third party contractor with $2,475/unit proposal except that the idle facilities will be use to produce 800 modified hoist for hospital operating rooms. ADVANTAGES |DISADVANTAGES | |Increase in profit | | V. Solutions Scenario #1 | |Per unit |3000 units/month | |Sales($4,350/per unit) |4,350 | |13,050,000 | | | | | | | |Variable Costs: | | | | | | Variable materials |550 | |1,650,000 | | | Variable labor |825 | |2,475,000 | | | Variable overhead |420 | |1,260,000 | | | Variable marketing |275 | |825,000 | | | Total Variable Costs | |2,070 | |6,210,000 | | | | | | | |Contribution Margin | |2,280 | |6,840,000 | | | | | | | |Fixed Costs | | | | | | Fixed overhed |660 | |1,980,000 | | | Fixed marketing |770 | |2,310,000 | | | Total Fixed Costs | |1,430 | |4,290,000 | | | | | | | |Net Operating Income | |850 | |2,550,000 | | | | | | | Q1 A: |Break-even volume in units | = |FC/CM per unit | | | | = |4290000/2280 | | | | | = |1,882 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |Q1 B: | | | | | |Break-even in sales | = |FC/CM% | | | | | = |8184868. 21 | | | | | | | | | |CM% | = |unit CM/unit selling price | | | | | = |0. 524137931 | | | Scenario #2 [pic] Scenario #3 [pic][pic] Scenario #4 [pic] Scenario #5 [pic] [pic] Scenario #6 [pic] Scenario #7 [pic][pic] [pic] VI. Conclusion/Recommendation: Q1: At first, the break-even in units is 1882, which means producing 1882 units per month brings 0 profit to company.
Second, maximum producing capacity of Hospital Supply is 4000 units, therefore any monthly producing quantity higher than 4000 units will out of its business. According to the above we mentioned, our group suggest the company should produce its products higher than 1882 units per month and less than or equal to 4000 units per month (4000>=X>1882) Q2: We do not suggest this company to decrease the price of per unit to $3850. Decreasing price will be increased total sales in $, however company’s operation income will be decreased $61000 compare to regular selling price. Moreover, this low price will increase the total variable costs but there is no changing in total fixed costs.
Q3: According to our result of question #3, if company are going to accept 500 units order from government while produce 3,500 units for its customers, it will decrease operation income $617,500 compare to company just producing 4000 units for its customer. Therefore, our group does not suggest Hospital Supply to accept government’s order. Q4: The minimum cost of per unit for this foreign order is $2227, 0 profit can be earned if company going to sell $2227/unit to its foreign customer. In other words, any selling price higher than $2227/unit will bring profit to Hospital Supply. Q5: The minimum price that would be acceptable in selling these 1000 units is $275/unit.
Because these 200 units is remaining products from last month, therefore all costs (Fixed & Variable) was computed in the last month income statement already except variable marketing cost(because these 200 remaining units were not be sold in last month), this variable marketing cost comes from the action what is selling these 200 units. Since the inventory of 200 units of obsolete models will be valueless soon, its immediate sale or disposal is desired to save inventory space (cost). Production costs and the fixed costs associated with it are absorbed as expense and loss by the company due to its obsolescence. However, because it needs to be sold through regular channels, variable marketing costs will be incurred in the selling activity.
Hence, the 275 variable marketing costs per unit would be its break-even price per unit. The minimum price therefore would have to be 276 to give incentive for the company to sell these products rather than throw them away. Q6: If Hospital Supply is going to produce 2000 units in house and contract 1000 units to another company, Hospital Supply will need to pay maximum $2,444/unit to its contractor for maintaining the same Net Operating Income as producing 3000 units in house. In other words, any price higher than $2,444/unit will decrease its “regular NOI”. However, this contractor requires &2,475/unit for outsourcing, it absolutely will decrease Hospital Supply’s NOI compare to producing 3000 units in house.
Thus, our group do not suggest accept for a price of $2,475 per unit. Q7: If Hospital Supply is going to produce 2000 units in house , 1000 units to contractor and 800 unit modified, Hospital have to pay the maximum $2,950/unit to its contractor for maintaining the same Net Operating Income as producing 3800 units in house. In other words, any price higher than $2,950/unit will decrease its “regular NOI”. Fortunately, its contractor only requires $2,475/unit for outsourcing, therefore (2950-2475) X 1000 = $475,000 is the profits that Hospital accepting contractor’s price of $2,475/unit, so Hospital Supply should accept for a price of $2,475 per unit. [pic] ———————– Page 1 Group 3
