Carl's Medical Equipment Company manufactures hospital gurneys. Its' mostpopular model, Ultra, sells for $5,000. It has variable costs of $2,800 and fixedcosts of $1,000 per unit, based on an average production run of 5,000 units. Itnormally 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 gurney, similar to Ultra that will sell for$4,000.Management believes it must lower the price to compete. Marketing believes thatthe new price will increase sales by 25% a year. The plant manager thinks thatproduction can increase by 25% with the same level of fixed costs. The companycurrently sells all the Ultra gurneys it can produce.Required:a. What is the annual operating income from Ultra at the current price of $5,000and normal production?b. What is the annual operating income from Ultra if the price is reduced to $4,000and sales in units increase by 25%?c. What is the target cost per unit for the new price if target operating income is20% of sales?

Variable cost will change with change in quantity and Fixed cost will remain same at all unit of…

Answered: Carl's Medical Equipment Company…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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