1. Cost Management
Group Assignment
EPGP 2009-10 - Term II- Group Submission – Case I
25-Nov-2009
Instructor: Prof. Keyur B. Thaker
Submitted by:
Abhishek Pangaria - #1
Altaf Hussain Siddiqui - #4
Rajendra Inani - #27
Shikhar Mohan - #34
Tarandeep Singh - #37
Vaibhav Samant - #38

2. Table of Contents
1 Case Background................................................................................................................................3
1.1 What is the break-even in units and in dollars?...........................................................................3
1.2 Would you recommend a strategy to increase sales to 3,500 units by reducing price to 3,850? 5
1.3 In March, the Federal government made an offer to the company to supply 500 units at a
profit of $ 275,000. If this order is accepted 500 unit of regular business will be lost. What is your
recommendation?.............................................................................................................................6
1.4 Hospital Supply is evaluating an opportunity to enter a foreign market with an initial 1,000
units. It plans to introduce its product at a low cost to enter the market. It will incur an additional
$410 per unit for shipping and total of $22,000 as marketing cost. What should be the lowest
price?.................................................................................................................................................7
1.5 An inventory of 200 units of hoists remains in the stockroom. What should be the minimum
selling price for these units?..............................................................................................................7
1.6 An outside contractor has given a proposal to make 1,000 unit. This would reduce 20% of
variable marketing cost and 30% of fixed manufacturing cost. Should this order be accepted at a
rate of 2,475 per unit?.......................................................................................................................8
1.7 All situation remaining the same as question 6, but if the company can produce 800 modified
hoists selling at $4,950 and with a variable marketing and manufacturing cost of $550 &f $ 3,025
respectively, should the proposal be accepted at $ 2,475 per unit if the manufacturing costs
remain the same?..............................................................................................................................9
Cost Management – Group Assignment – Case I Page |2

3. 1 Case Background
Hospital Supply, Inc is in the business of Hydraulic hoists that are used in hospitals to move
bed ridden patients. Normally, they sell 3,000 units per month at the rate of $4,350 per unit.
The cost of manufacturing & marketing this product as maintained by the company is as
below:
Sales (units) 3000
Variable
Materials 550
Labour 825
Variable O/H 420
Fixed O/H 660
Total 2455
Marketing cost
Variable 275
Fixed 770
Total marketing cost 1045
Total Unit Cost 3500
1.1 What is the break-even in units and in dollars?
Total fixed cost = 4,290,000 [(660+770) x 3000]
Total Variable cost per unit = 2070
Contribution = SP-VC = 2280
Break-even units = FC/contribution = 1882
Break-even dollar sales = Break-even units * SP = $ 8,186,700
Cost Management – Group Assignment – Case I Page |3

4. The calculations are as given below:
Sales (Units) 3000
Selling Price 4350
Variable
Materials 550
Labour 825
Variable O/H 420
Marketing 275
Total Variable 2070
Fixed Costs
Overhead 1980000
Marketing 2310000
Total Fixed cost 4290000
Contribution 2280
Break Even Units 1882
Break Even $ Value 8,186,700
Profit 2,550,000
Cost Management – Group Assignment – Case I Page |4

5. 1.2 Would you recommend a strategy to increase sales to 3,500 units by
reducing price to 3,850?
The calculations for the suggestion are as below:
Sales (Units) 3500
Selling Price 3850
Variable
Materials 550
Labour 825
Variable O/H 420
Marketing 275
Total Variable 2070
Fixed Costs
Overhead 1980000
Marketing 2310000
Total Fixed cost 4290000
Contribution 1780
Break Even Units 2411
Break Even $ Value 10,487,850
Profit 1,940,000
Recommendation: Do not opt for this strategy as the overall profit actually decreases.
Cost Management – Group Assignment – Case I Page |5

6. 1.3 In March, the Federal government made an offer to the company to
supply 500 units at a profit of $ 275,000. If this order is accepted 500 unit
of regular business will be lost. What is your recommendation?
The calculations for both the scenarios are shown below:
Without Govt Order With Govt Order
Sales (Units) 4000 Sales (Units) 3500
Selling Price 4350 Selling Price 4350
Variable Variable
Materials 550 Materials 550
Labour 825 Labour 825
Variable O/H 420 Variable O/H 420
Marketing 275 Marketing 275
Total Variable 2070 Total Variable 2070
Fixed Costs Fixed Costs
Overhead 1980000 Overhead 1980000
Marketing 2310000 Marketing 2310000
Total Fixed cost 4290000 Total Fixed cost 4290000
Contribution 2280 Contribution 2280
Break Even Units 1882 Break Even Units 1882
8,186,70 8,186,70
Break Even $ Value 0 Break Even $ Value 0
Govt Profit 275000
4,830,00 3,690,00
Profit 0 Op Profit 0
3,965,00
Total Profit 0
We observe that the overall profit is higher when the government order is not taken up.
Cost Management – Group Assignment – Case I Page |6

7. 1.4 Hospital Supply is evaluating an opportunity to enter a foreign market
with an initial 1,000 units. It plans to introduce its product at a low cost
to enter the market. It will incur an additional $410 per unit for shipping
and total of $22,000 as marketing cost. What should be the lowest price?
The minimum selling price should be $ 2227.
The details are given below:
Foreign Order
Sales (Units) 1000
Variable
Materials 550
Labour 825
Shipping 410
Variable O/H 420
Marketing 0
Total Variable 2205
Fixed Costs
Marketing 22000
Mktg Cost / unit 22
Total / unit cost 2227
Min selling price 2,227
1.5 An inventory of 200 units of hoists remains in the stockroom. What
should be the minimum selling price for these units?
As the manufacturing cost has already been incurred and the inventory will become valueless in
some time; the only cost to be considered should be the incremental marketing cost per unit i.e.
275 per unit.
Therefore the minimum selling price should be $ 275
Cost Management – Group Assignment – Case I Page |7

8. 1.6 An outside contractor has given a proposal to make 1,000 unit. This
would reduce 20% of variable marketing cost and 30% of fixed
manufacturing cost. Should this order be accepted at a rate of 2,475 per
unit?
Total profit in complete in house production is $ 2,550,000
Total profit by accepting this order increases to $ 2,849,000.
Therefore the proposal should be accepted.
Original In house production Outside contractor
Sales (Units) 3000 Sales (Units) 2000 Sales (Units) 1000
Selling Price 4350 Selling Price 4350 Selling Price 4350
Variable Variable Variable
Materials 550 Materials 550
Labour 825 Labour 825
Variable O/H 420 Variable O/H 420
Marketing 275 Marketing 220
Total Variable 2070 Total Variable 2015 Total Variable 2475
Effective total variable 2,168.3
cost
Fixed Costs Fixed Costs Fixed Costs
Overhead 1980000 Overhead 1386000 Overhead 1386000
Marketing 2310000 Marketing 2310000 Marketing 2310000
Total Fixed cost 4290000 Total Fixed cost 3696000 Total Fixed cost 3696000
Total per unit cost 3500 Total per unit cost 3863 Total per unit cost 3,400.3
Contribution 2280 Contribution 2335 Net Impact per unit 99.67
Break Even Units 1882 Break Even Units 1583 Total Gain 299000
Break Even $ Value 8,186,70 Break Even $ Value 6,886,050
0
Revenue 1305000
0
Profit 2,550,00 Profit 974,000 Total Profit 2,849,0
0 00
Cost Management – Group Assignment – Case I Page |8

9. 1.7 All situation remaining the same as question 6, but if the company can
produce 800 modified hoists selling at $4,950 and with a variable
marketing and manufacturing cost of $550 &f $ 3,025 respectively, should
the proposal be accepted at $ 2,475 per unit if the manufacturing costs
remain the same?
The overall profits increase to $ 3,955,000. Hence the proposal should be accepted.
Regular Hoists Modified Hoists Contractor
Sales (Units) 2000 Sales (Units) 800 Sales (Units) 1000
Selling Price 4350 Selling Price 4950 Selling Price 4950
Variable Variable
Materials 550 Manufacturing 3025
Labour 825
Variable O/H 420
Marketing 220 Marketing 550
Total Variable 2015 Total Variable 3575 Total cost 2475
Fixed Costs
Overhead 1980000
Marketing 2310000
Total Fixed cost 4290000
Total per unit cost 4160
Contribution 2335 Contribution 1375 Contribution 2475
Break Even Units 1838
Break Even $ Value 7,995,300
Profit 380,000 New Profit 1,480,000 Total profit 3,955,000
Cost Management – Group Assignment – Case I Page |9