Case l6-1: Hospital Supply, Inc.* Approach The Hospital Supply case is placed in this chapter for those instructors who wish to expose students to alternative choice decisions and the related differential costing prior to getting into the details of full costing. Because in many programs the marketing and management accounting courses begin at the same time, this case also enables the accounting instructor to assist his or her colleagues in marketing by introducing break-even analysis at the start of the term; questions 1 and 4 can be used for this purpose. The case is also useful for giving students a good understanding of the fixed/variable cost dichotomy. In particular, I think it worthwhile to emphasize to students that fixed costs may be "unitized" (i.e., allocated to individual units of product) for certain purposes, and that this allocation procedure may make such costs appear to be variable. Indeed, many students treat the $660 per unit fixed manufacturing overhead and $770 per unit fixed marketing costs as though they were variable costs, despite the fact that they are clearly labeled "fixed." Finally, I use the case to introduce the concept of opportunity cost. Question 3 can be used in this way, as can question 5 if you postulate a scrap value for the obsolete hoists.

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This teaching note was prepared by Professor James S. Reece based on solutions prepared by Professor Michael Maher. Copyright © by. James S. Reece.

Comments on Questions Question 1 Total fixed costs (TFC) = fixed costs per unit times normal volume =($660 + $770)*3,000 = $4,290,000. Contribution margin per unit = unit price minus unit variable costs = $4,350 - $2,070 = $2,280.
Break  even volu  me $4,290,000  1,882 units $2,280

 $4,350 - 2,070  Break  even sales  $4,290,000/   $8,185,461 $4,350  
(actually, 1,882 *$4,350 = $8,186,700) Question 2 Recommendation: