Steven\'s Medical Equipment Company manufactures hospital beds. Its most popular

Question

Steven'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 $600,000 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 the price 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

Question-1- Answer-$21600000

Question-2- Answer-$7000000

Question 1: What is the annual operating income from Deluxe at the price of $5,000 Particulars Rate in $ No of run production per run Amount in $ Sales 5000 4 5000 100000000 Less- variable cost 2800 4 5000 56000000 Fixed cost 1000 4 5000 20000000 Set up cost 600000 4 2400000 Operating Income 21600000 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% Particulars Rate in $ No of run production per run Amount in $ Sales 4000 5 5000 100000000 Less- variable cost 2800 5 5000 70000000 Fixed cost-same as above 20000000 Set up cost 600000 5 3000000 Operating Income 7000000

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