(TCO 5) Jane\'s Medical Equipment Company manufactures hospital beds. Its most p

Question

(TCO 5) 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.

Question 1:What is the annual operating income from Deluxe at theprice of $5,000?

Question 2: 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

Hi, If you like my answer rate me lifesaver first...that way only I can earn points. Thanks a) Annual operating Income = 4 *( $(5000 - 2800 - 1000) * 5000 - $700000) = $2,1200,000 b) production increases by 25% i.e. become 6 runs a year Annual operating Income = 6 *( $(4000 - 2800 - 1000) * 5000 - $700000) = $1,800,000 This should not be done as there is significant drop in operating income.

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