General Medical Inc. makes disposable syringes that it sells to hospitals and me
ID: 1139706 • Letter: G
Question
General Medical Inc. makes disposable syringes that it sells to hospitals and medical supply companies. It normally sells its syringes for $1.20 each. It has the following costs per unit: Rent $0.10 per unit Materials $0.35 per unit Syringe Production Workers $0.45 per unit (hourly workers) Executives /Managers Salary $0.10 per unit (fixed salary) General Medical has learned of an opportunity to sell 300,000 syringes to the Department of Defense if they can be delivered within 3 months at a price of $1.00 per unit.
1. Suppose General Medical has the capacity to produce 300,000 more syringes. Should General Medical accept the Department of Defense order?
2. Now suppose that General Medical must decrease production by 100,000 syringes selling at a price of $1.20 to its regular customers in order to sell 300,000 more syringes at a price of $1.00 per unit to the Department of Defense. (The loss of 100,000 syringes will not affect future sales to its regular customers.) Should General Medical now accept the Department of Defense order?
Explanation / Answer
Answer : 1) Based on given informations,
Per unit variable cost = Rent cost + Material cost + Worker cost = 0.10 + 0.35 + 0.45 = $ 0.90
Per unit fixed cost = Manager salary = $0.10
Per unit total production cost = Per unit variable cost + Per unit fixed cost = 0.90 + 0.10 = $1
Total cost of producing 300,000 syringes = Per unit cost * Production level = 1 * 300,000 = $300,000
Normal selling price = $1.20
Total revenue = Price * Quantity = 1.20 * 300,000 = $ 360,000
Profit of General Medical for normal selling = Total Revenue - Total Cost = $360,000 - $300,000 = $60,000
Now, if General Medical accept the order of Defence Department then the General Medical heve to sell 300,000 syringes at $1. As a result, Total Revenue = pice * quantity = 1 * 300,000 = $300,000. Total cost of 300,000 syringes = $300,000.
Therefore,
Profit to Defence Department selling = Total Revenue - Total Cost = 300,000 - 300,000 = $0.
As General Medical does not gets any profit by selling syringes to Defence Department, hence General Medical will not accept the order of Defence Department.
2) Total cost of 100,000 syringes = Per unit cost * Production level = 1 * 100,000 = $100,000
This 100,000 syringes price level = $1.20
Total Revenue = Price * Quantity level = 1.20 * 100,000 = $120,000
Profit = Total Revenue - Total Cost = $120,000 - $100,000 = $20,000
Now, if General Medical decraese the production of 100,000 syringes whose selling price level is $1.20 then it loses the profit of $20,000. As by selling 300,000 syringes to Defence Department the General Medical earns $0 profit and by rduced 100,000 syringes loses 20,000 profit to give the supply of 300,000 syringes to Defence Department, hence the General Medical will not accept the order of Defence Department.
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