Jane’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 $700,000 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 sells all the Deluxe beds it can
produce. Question 1: What is the annual operating income from Deluxe at
the 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%?