Jane\'s Medical Equipment Company manufactures hospital beds. Its most popular m
ID: 2354764 • Letter: J
Question
Jane's Medical Equipment Company manufactures hospital beds. Its most popular model, Deluxe, sells for $5,000. It has variable costs totaling $2,800 and fixed costs of $1,000 per unit, based on an average production run of 5,000 units. It normally has four production runs a year, with $700,000 in setup costs each time. Plant capacity can handle up to six runs a year for a total of 30,000 beds. A competitor is introducing a new hospital bed similar to Deluxe that will sell for $4,000. Management believes it must lower the price to compete. Marketing believes that the new price will increase sales by 25% a year. The plant manager thinks that production can increase by 25% with the same level of fixed costs. The company sells all the Deluxe beds it can produce. A) What is the annual operating income from Deluxe at the price of $5,000? B) What is the annual operating income from Deluxe if the price is reduced to $4,000 and sales in units increase by 25%?Explanation / Answer
SIMILAR PLS RATE
3. Robert's Medical Equipment Company manufactures hospital beds. Its most popular model, Deluxe, sells for $5,000. It has variable costs totaling $2,800 and fixed costs of $1,000 per unit, based on an average production run of 5,000 units. It normally has four production runs a year, with $400,000 in setup costs each time. Plant capacity can handle up to six runs a year for a total of 30,000 beds.
A competitor is introducing a new hospital bed similar to Deluxe that will sell for $4,000. Management believes it must lower the price to compete. Marketing believes that the new price will increase sales by 25% a year. The plant manager thinks that production can increase by 25% with the same level of fixed costs. The company currently sells all the Deluxe beds it can produce.
Required:
a. what is the annual operating income from Deluxe at the current price of $5,000?
Sales (20,000 x $5,000) $100,000,000
Costs: Variable costs (20,000 x $2,800) $56,000,000
Fixed costs ($1,000 x 5,000 x 4) 20,000,000
Setup costs ($400,000 x 4) 1,600,000 77,600,000
Operating income $ 22,400,000
b.What is the annual operating income from Deluxe if the price is reduced to $4,000 and sales in units increase by 25%
Sales (25,000 x $4,000) $100,000,000
Costs: Variable costs (25,000 x $2,800) $70,000,000
Fixed costs, same 20,000,000
Setup costs ($400,000 x 5) 2,000,000 92,000,000
Operating income $ 8,000,000
c.what is the target cost per unit for the new price if target operating income is 20% of sales?
$4,000 - $4,000(0.20) = $3,200
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.