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Robert's Medical Equipment: Annual Operating Income at 2 Product Prices

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.

Question 1: What is the annual operating income from Deluxe at the current 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%?

Solution Preview

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

Sales ($5,000 x 5,000 units x 4 production runs) $100,000,000
Less: Variable costs ($2,800 x 5,000 units x 4 production runs) ...

Solution Summary

This solution is comprised of a detailed explanation to answer what is the annual operating income from Deluxe at the current price of $5,000 and then with a price reduction.

$2.19