ACCOUNTING HOSPITAL SUPPLY INC

Question 1:
i. Fixed Cost = ($660 + $770) x 3,000 units
= $4,290,000.00

Variable Cost = $550 + $825 + $420 + $275 = $2,070

Total Variable Cost = $2,070 x $3,000 = $6,210,000.00

Unit Contribution Margin = Sales – Variable Cost = $4,350 – $2,070 = $2,280

ii. Contribution Margin Ratio = Total Variable Cost
Total Sales = $2,280 x 3,000 $4,350 x 3,000 = 0.524137

iii. Break even volume in units = Total Fixed Cost
Unit Contribution Margin
= $4,290,000 $2,280
= 1,881.578
= 1,882 units

iv. Break even in sales dollar =break even volume in units x sales
= 1,882 x $4,350 = $8,186,700.00

Question 2: What would you recommend that this action be taken? What would be the impact on monthly sales, costs and income?

i. Fixed Cost = $4,290,000.00

Unit Contribution Margin = Sales – Variable Cost = $3,850 – $2,070 = $1,780

ii. Break even volume in units = Total Fixed Cost
Unit Contribution Margin
= $4,290,000.00
$1,780
= 2410.11 ≈ 2411 units

Before Price Reduction:
Sales Revenue (selling price per unit = $4,350, volume at 3,000 unit) = $4,350 x 3,000 = $13,050,000.00

Income (selling price at $4,350, volume at 3000 units)
= 13,050,000.00 – ($2,070 x 3,000) – 4,290,000
= $2,550,000.00

After Price Reduction:
Sales Revenue (selling price per unit = $3,850, volume at 3,500 unit) = $3,850 x 3500 = $13,475,000.00

Income (selling price at $3,850, volume at 3500 units) = 13,475,000.00 – (2070 x 3500) - 4,290,000 = $1,940,000.00
Item
Before Price Reduction ($)
After Price Reduction ($)
Difference ($)
Price
4,350
3,850
(500)
Quantity
3,000
3,500
500
Revenue
13,050,000
13,475,000
425,000
Income
2,550,000
1,940,000
(610,000)

This action is not recommended due to:-
It would take 1,882 units to break even in the before price reduction, whereas 2,411 units after the price reduction.
Lowering price, increase revenue slightly only. However, it reduced profit almost