Reference no: EM132367404

Answer the Following Questions :

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 mentioned in Exhibit 1 or in a question itself.

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 delivery 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 competitor. The contract given by the government would reimburse the government's share of March production costs, plus pay a fixed fee (profit) of $275,000. (There would be no variable marketing costs incurred 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 foreign 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 Supply's sales force. Hospital Supply's fixed marketing costs would be unaffected, but its variable marketing costs would be cut by 20 percent (to $220 Per unit) for these 1,000 units produced by the contractor. 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 $2,475 per unit?

7. Assume the same facts as above in Question 6 except that the idele 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. Variable marketing costs would be $550 per unit. Fixed marketing and manufacturing costs would be unchanged whether the original 3,000 regular hoists were manufactured or the mix of 2,000 regular hoistsplus 800 modified hoists was produced. What is the maximum purchase price per unit that Hospital Supply should be willing to pay the outside contractor? Should the proposal be accepted for a price of $2,475 per unit to the contractor?

Problem 16.3

a. What is Doyle's Candy Company's break-even point in boxes of candy for the cur¬rent year?

b. What selling price per box must Doyle's Candy Company charge to cover the 15 percent increase in variable production costs of candy and still maintain the currrent contribution margin percentage?

c. What volume of sales in dollars must Doyle's Candy Company achieve in the com¬ing year to maintain the same net income after taxes as projected for the current year if the selling price of candy remains at $9.60 per box and the variable produc-tion costs of candy increase 15 percent?

Mike Solid started a pizzeria in 1999. For this purpose he rented a building for $1,800 per month. Two persons were hired to work full-time at the restaurant and six college students were hired to work 30 hours per week delivering pizza. An outside accountant was hired for tax and bookkeeping purposes at a cost of $900 per month. The necessary restaurant equipment and delivery cars were Purchased with cash. Mr. Solid has noticed that ex¬penses for utilities and supplies have been rather constant.

Mr. Solid increased his business between 1999 and 2001. Profits have more than doubled since 1999. Mr. Solid does not understand why his profits have increased faster his volume.

A projected income statement for 2002 has been prepared by the accountant and is shown below:

Projected Income Statement For the Year Ended December 31, 2002
Sales		$308,000
Cost of food sold	$92,400
Wages & fringe benefits of restaurant help	26,650
Wages & fringe benefits of delivery persons	54,100
Rent	15,500
Accounting services	10,900
Depreciation of delivery equipment	16,000
Depreciation of restaurant equipment	8,000
Utilities	7,165
Supplies (soap, floor wax, etc.)	10,645	241,360
Income before taxes		66,640
Income taxes		19,992
Net Income		$ 46,648

Note: The average pizza sells for $8.50. Assume that Mr. Solid pays out 30 percent of his income in income taxes.

Required:

a. What is the break-even point in number of pizzas that must be sold?

b. What is the cash flow break-even point in number of pizzas that must be sold?

c. If Mr. Solid withdraws $14,400 for personal use, how much cash will be left from the 2002 incomeproducing activities?

d. Mr. Solid would like an after-tax net income of $60,000. What volume must be reached in number of pizzas in order to obtain the desired income?

e. Briefly explain to Mr. solid why his profits have increased at a faster rate than his sales.

f. Briefly Explain to Mr. Solid why his cash flow for 2002 will exceed his profits.

Attachment:- Exhibit.rar