46059386-Hospital-Su - Hospital Supply Alternative choice decisions Differential costing Hospita l supply produce s hydra ulic hosit Normal Volume

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Unformatted text preview: Hospital Supply Alternative choice decisions Differential costing Hospita l supply produce s hydra ulic hosit Normal Volume units Reguler Selling Price $/ unit 3000 4350 Unit Ma nufa cturing Cost Variable Material $ Variable Labor Variable Overhead Fixed Overhead Tota l Ma nufa cturing cost/ unit 550 825 420 660 2455 Unit ma rke ting Costs Variable Fixed Tota l Unit Ma rke ting Cost 275 770 1045 Tota l Unit Cost 3500 Total fixed mfg Overhead Total Fixed Marketing Cost 1,980,000 2,310,000 T ota l fix e d cost 4,290,000 Reguler Selling Price $/ unit Total Variable Cost per unit Contribution per unit Contribution % Break even units Break even reveneu Break Even Sales 1882 1881 4350 2070 2280 52.4% 1,882 8,184,868 8,186,700 8,182,350 Question 1 Total fixed costs (TFC) = fixed costs per unit times normal volume =($660 + $770)*3,000 = $4,290,000. Contribution margin per unit = unit price minus unit variable costs = $4,350 - $2,070 = $2,280. (actually, 1,882 *$4,350 = $8,186,700) $4,290,000 Break  even volu me ! ! 1,882 units $ 2 , 280 Break  even sales ! ¨ $4,350 - 2,070 ¸ $4,290,000 / © ¹ ! $ 8,185 ,461 $ 4,350 ª º Question 2: Price reduced to $3850 and volume increase to 3500 units . Before Price Reduction $ 4,350 After Price Reduction $ 3,850 Difference $ (500) Quantity 3,000 3,500 500 Revenue $13,050,000 $13,475,000 $ 425,000 ( 5,385,000) (6,282,500) (897,500) (825,000) (962,500) (137,500) 6,840,000 6,230,000 (610,000) (1,980,000) (1,980,000) -- (2,310,000) (2,310,000) -- $ 2,550,000 $ 1,940,000 $(610,000) Impact: Price Variable mfg. Costs Variable mktg. Costs Contribution margin Fixed mfg. Costs Fixed mktg. Costs Income Recommendation: Lowering prices reduces income. Other factors, such as the reduction of available capacity and the capacity and the impact on market share, could also affect the decision Note: that the differential contribution margin and differential income are the same. Question 3: Govt order to supply 500 units: Cost reimbursement + Profit of $ 275,000. Sales foregone to regular customer 500 units. Running at full capacity 4000 units Impact: Without Govt. Contract Revenue $17,400,000 Variable mfg. Variable mktg. Costs Contribution margin Fixed mfg. Costs Fixed mktg. Costs Income With Government Contract Regular $15,225,000 Government $1,420,000 Total $16,645,000 Difference $(755,000) (897,500) (7,180,000) (6,282,500) -(7,180,000) -(1,100,000) 9,120,000 (962,500) 7,980,000 522,500 137,500 (962,500) 8,502,500 (617,500) -- (1,980,000) (1,980,000) -- (2,310,000) $ 4,830,000 (2,310,000) $ 4,212,500 $(617,500) Recommendation: Don't accept contract [1]Government revenue = (500 * $1,795) +.125 ($1,980,000) + $275,000 = $1,420,000, assuming the government's "share" of March fixed manufacturing costs is .125 (500/4,000). A shorter approach to question 3 Forgone contribution (equals forgone income, as was illustrated by question 2) on regular sales if government contract is accepted 500 * $2,280 = $1,140,000 Income from government contract: Fixed fee 275,000 Share of fixed mfg. costs (1/8 * $1,980,000) 247,500 522,500 Differential income if contract accepted $(617,500) Question 4: Sell 1000 units to Foreign Market. Marketing contract to cost $22,000 and shipping cost per unit to be $410. MiniMinimum price = variable mfg costs + shipping costs + order costs = $1,795 + $410 + $22,000/1,000 = $2,227 At this price per unit, the $2,227,000 of differential costs caused by the 1,000-unit order will just be uncovered. One can solve for this price using the break-even formula (UR = unit revenue): TCF UR  UVC !Q 22,000 UR  2,205 ! 1,000 units $22,000 = 1,000UR - $2,205,000 $2,227,000 = 1,000UR $2,227 = UR Question 5: At what Minimum acceptable price, to sell 200 units of obsolete model of hoist through regular sales channel? The manufacturing costs are sunk; therefore, any price in excess of the differential costs of selling the hoists will add to income. In this case, those differential costs are apparently the $275 per unit variable marketing costs, since the hoists are to be sold through regular channels; thus the minimum price is $275. A different view: opportunity cost, the price should exceed the sum of (1) the differential marketing costs and (2) the potential scrap proceeds, which are an opportunity cost of selling the hoists rather than scrapping them.) Caveat: assumes, that sale of these "obsolete" hoists will not cut into sales of the current model. If this assumption is not valid, then the contribution margin on any "cannibalized" sales must be taken into Question 6, What price is equivalent to in-house cost of production? Total revenue Total variable manufacturing costs (4000 x 2070) & x 2015) Total variable marketing costs Total contribution margin Total fixed manufacturing costs Total fixed marketing costs Payment to contractor Income All Production In-house $13,050,000 1,000 Units Contracted $13,050,000 (5,385,000) (3,590,000) (825,000) 6,840,000 (770,000) 8,690,000 (1,980,000) 2,310,000 (1,386,000) (2,310,000) -- _________X $ 2,550,000 $ 4,994,000 - X $4,994,000 - X = $2,550,000 X = $2,444,000 or $2,444 per unit maximum purchase price Therefore, a $2,475 purchase price is not acceptable; it would decrease income by $31,000 [($2,475 - $2,444) * 1,000]. A shorter approach uses the concept of opportunity costs: Variable manufacturing cost Variable marketing opportunity cost ($275 220) Fixed manufacturing opportunity cost Equivalent in-house cost *($1,980,000 - $1,386,000)/1,000 units $1,795 55 594* $2,444 Question 7: Ideal capacity used to make 800 modified hoists - Sold at $4950. Variable Mfg cost $3025, Marketing Cost $550. Unchanged Fixed Mfg OH. What max price can be paid to contractor? Is $247 acceptable? 3,000 Regular Hoists Produced In-house Revenue Variable mfg. costs Contract 1,000 Regular Hoists and Produce 800 Modified Hoists Regular (In) Regular (Out) Modified Total $13,050,000 $8,700,000 $4,350,000 $3,960,000 $17,010,000 (5,385,000) (3,590,000) -- (2,420,000) (6,010,000) Variable mktg. costs (825,000) Contribution margin 6,840,000 (550,000) (220,000) (440,000) (1,210,000) Fixed mfg. costs -- 1,100,000 9,790,000 (2,310,000) Payment to contractor 4,130,000 (1,980,000) Fixed mktg. costs 4,560,000 Income (1,980,000) (2,310,000) -- (X) -(X) $ 2,550,000 $5,500,000 - X Maximum payment = $2,950,000. Or $2950/ unit. Now the proposal should be accepted as a price of $2,475. ...
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This note was uploaded on 12/07/2011 for the course MBA 0001 taught by Professor Akshat during the Spring '09 term at Institute of Management Technology.

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