Paul's Medical Equipment Company manufactures hospital beds. Its most popular model Deluxe sells for $5000. It has variable costs totaling $2800 and fixed cost o $1,000 per unit, based on average production run of 5,000 units. It normally has four production runs a year with 500,000 in set up cost 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 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 cost. 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%?