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Epgp (one year) 2009-10_cost management_group assignement_case i_25nov09
Epgp (one year) 2009-10_cost management_group assignement_case i_25nov09
Epgp (one year) 2009-10_cost management_group assignement_case i_25nov09
Epgp (one year) 2009-10_cost management_group assignement_case i_25nov09
Epgp (one year) 2009-10_cost management_group assignement_case i_25nov09
Epgp (one year) 2009-10_cost management_group assignement_case i_25nov09
Epgp (one year) 2009-10_cost management_group assignement_case i_25nov09
Epgp (one year) 2009-10_cost management_group assignement_case i_25nov09
Epgp (one year) 2009-10_cost management_group assignement_case i_25nov09
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Epgp (one year) 2009-10_cost management_group assignement_case i_25nov09

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  • 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

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