Hospital supply

1 Fixed Costs
per unit mftg
per unit mktg
Total
Contribution per unit
Selling price
Variable cost
Monthly volume
Total contribution-current

660
770
4290000

4350
2070
2280
3000
6840000

BEP units

1881.578947368

BEP sales

$8,184,868.42

2 Revised selling price

Variable cost
Revised contribution
Monthly volume
Total contribution -revised
Difference in Income
3

Total fixed cost

1980000
2310000

3850
2070
1780
3500
6230000

Decrease in profi
Increase in profit
Net decrease

-610000
without govt
Contract

with
Regular

Revenue

17400000

15225000

Variable mftg
Variable mktg

7180000
1100000

6282500
962500

Contribution

9120000

7980000

Fixed mftg
Fixed mktg

1980000
2310000

Income

4830000

Alternate approach
Contribution on 500 units

1140000

See below for third approach

4 Minimum price on foreign order
Per Unit
Variable Mftg costs
Shipping costs
Marketing cost PU
Minimum unit price

1795
410
22
2227

5 Minimum price on obsolete model

Variable Mktg costs

on 1000 units
1795000
410000
22000
2227000

275

6 Proposal of the Contractor

All Inhouse
Production
Cost for
3000units
5385000
825000
1980000
2310000

Total variable manufacturing

costs
Total variable marketing costs
Total fixed manufacturing
costs
Total fixed marketing costs

10500000

Total costs
Cost per unit
Relevant cost approach
Variable Mftg costs
Saving in Mktg costs
Saving in fixed costs
Maximum price offer

Per Unit
1795
55
594
2444

on 1000 units
1795000
55000
594000
2444000

7 Relevant cost approach

Variable Mftg costs
Saving in Mktg costs
Contribution on modified
Maximum price offer

Per Unit
1795
55
1100
2950

Contribution on modified
Sale price
Variable Mftg costs
Variable Mktg costs
Contribution on modified

4950
3025
550
1375

Incremental profit per unit

Incremental profit on 1000 units

Calculation of Profit per unit

Variable cost per unit
fixed manufacturing costs
fixed marketing costs
Total cost per unit
Selling Price per unit
Profit per unit
Profit on 500 units regular
production
Profit on 500 units government
contract

on 1000 units
1795000
55000
1100000
2950000

475
475000

without govt
Contract

With Govt contract

on 4000 units

on 3500 units

2070
495
577.5
3142.5
4350
1207.5

603750

Difference in profit

275000
328750

Also reduction of profit on

3500 units when govt contract
is accepted

288750

2070
495
660
3225
4350
1125

Net difference in profit

617500 Same as above

Fixed manufacturing cost per unit does not change with or without government contract s
But fixed marketing cost per unit is increased since the cost is distributed only on 3500 un
So there is also change in profit on 3500 units which is relevant
But under the earlier approach, we compare contribution per unit, it remains the same und
Also fixed cost is addressed in totality, doesnot change and hence irrelevant
But when you unitize the fixed cost, one needs to be very careful, see how the profit on 35

1500000
890000
610000

Govt contract

Diff

Govt.

Total

1420000

16645000

-755000

897500

7180000
962500

0
137500

522500

8502500

-617500

1980000
2310000

0
0

Share of Fixed cost

Profit
Contribution on 500

Subcontract

4212500

-617500

247500
275000
522500

-617500

Difference
Saving in
inhouse cost

1000 units

Cost for 2000units

for 1000 units
3590000
1795000
770000
55000
1386000
594000
2310000
0
8056000

2444000
2444

ovt contract

this is what is causing the difference, see explanation below

Diff in profit per unit on 3500 units

-82.5

82.5 due to change in fixed mktg cost per unit

t government contract since in both cases 4000 units share the cost
tributed only on 3500 units, government doesnot reimburse share of fixed marketing cost

, it remains the same under both situations on 3500 units and hence can be ignored.
e irrelevant
see how the profit on 3500 units also becomes relevant

xed mktg cost per unit

arketing cost