Julian Pharma Manufactures Hospital Beds

question 181

Essay

Julian Pharma manufactures hospital beds. Its most popular model, Deluxe, sells for $5,000. It has variable costs totaling $2,650 and fixed costs of $1,200 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 $3,800. Management believes it must lower the price to compete. The marketing department 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.
Required:
a.What is the annual operating income from Deluxe at the current price of $5,000?
b.What is the annual operating income from Deluxe if the price is reduced to $3,800 and sales in units increase by 25%?
c.What is the target cost per unit for the new price if target operating income is 30% of sales?

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Definitions:

Autonomic Reflex Arc

A pathway that involves the autonomic nervous system, controlling involuntary functions of the body.

Sensory Neuron

A type of neuron that transmits signals from sensory receptors towards the central nervous system, allowing the body to react to environmental changes.

Integration Center

A region in the nervous system where information is processed and interpreted, usually involving the brain or spinal cord.

Parasympathetic Division

A branch of the autonomic nervous system that conserves energy by slowing the heart rate, increasing intestinal and gland activity, and relaxing sphincter muscles.