General Medical Inc. makes disposable syringes that it sells to hospitals and me
ID: 389729 • Letter: G
Question
General Medical Inc. makes disposable syringes that it sells to hospitals and medical supply companies. It normally sells its syringes for $1.20 each.
It has the following costs per unit:
Rent $0.10 per unit
Materials $0.35 per unit
Syringe Production Workers $0.45 per unit (hourly workers)
Executives /Managers Salary $0.10 per unit (fixed salary)
General Medical has learned of an opportunity to sell 300,000 syringes to the Department of Defense if they can be delivered within 3 months at a price of $1.00 per unit. Suppose General Medical has the capacity to produce 300,000 more syringes. 1. Should General Medical accept the Department of Defense order? 2. Now suppose that General Medical must decrease production by 100,000 syringes selling at a price of $1.20 to its regular customers in order to sell 300,000 more syringes at a price of $1.00 per unit to the Department of Defense. (The loss of 100,000 syringes will only last for 3 months and will not affect future sales to its regular customers.) Should General Medical now accept the Department of Defense order?
Explanation / Answer
Answer to question 1 :
Profit per unit from sales of 300,000 units
= Sales price / unit – Total cost / unit
= $1 / unit - $ 1/ unit
= 0
Since selling of additional 300,000 units don’t bring in any additional contribution, there is no point of selling additional 300,000 units
General Medical should not accept department of defense order
Selling price/ unit of 100,000 syringes = $1.2
Cost / unit of 100,000 syringes = $ 1/ unit
Thus , loss of profit by decreasing sales of 100,000 syringes
= ( $1.2- $1 ) x 100,000
= $20,000
On the other hand as explained,
Increase in profit by accepting order of 300,000 syringes from department of defense = 0
Therefore reduction in production of 100,000 syringes to accept order of 300,000 syringes of department of defense results in a loss of $20,000
Therefore, General Medical should not still accept the offer .
General Medical should not accept the department of defense’s order
General Medical should not accept department of defense order
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