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
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