Forever Young Laboratories Inc. (\"FYL) was started a few years ago by a group of engineers to design and develop power mobility device (PMDs) for the regional countries. FYL has invented and patented two models of PMDs: Joy and Happy. As the technology involved in the manufacturing process is both complex and expensive, FYL has been beset by high fixed costs. Bowen, the company's founder, is particularly concerned and has arranged a conference call over Zoom to discuss about profitability. He illustrated that average unit cost will fall with increase in production volume. He reasons that this was due to the company's fixed cost base. He extracted FYL data to produce the following table: PPra:ijec::zd Average Cost Per | Average Cost Per j\"l?nlll:in.:n Joy PMD* (8) | Happy PMD* () 435 [ 340 | [ 330 | * Defined as the total of fixed and variable manufacturing costs, divided by the production volume FYL currently has a production facility with a capacity of producing 60,000 PMDs per year. Bowen explains that if production reaches full capacity, FYL's profits will soar as all sales proceeds would not have to recover fixed costs (like rent, depreciation, fixed admin and selling expenses) and will contribute entirely to profits. As such, he believes presenting and analysing all product {manufacturing) costs as average unit cost can help management better control costs and achieve its profits targets. It is his belief that fixed costs 1s bad for business. Your team 1s the management accounting group, and shortly after the conference call, yvour Controller called a meeting to address the situation. She wants to know how profitability changes with production. The current production and sales volume is 30,000 units of Joy PMD and 20,000 units of Happy PMD respectively. Joy sells at an average selling price of $600 per unit and Happy, $700 per unit. Part | Required: (a) (b) Apply cost-volume-profit analysis to calculate the break-even point in units for each PMD sold by FYL. Other non-manufacturing fixed costs amounted to $2,000,000 per year. {10 marks) Explain if Bowen is correct about product costs. In particular, discuss if product costs can be all presented as unit variable costs for decision making, and whether fixed costs is bad for business as claimed by Bowen. (12 marks) The Controller informs your team of a discussion she had recently with the sales director about a potential customer from Cambodia. The customer wants to place an export order for 15,000 Joy PMDs to be shipped next month to Cambodia. He has offered a unit sales price of $520 for the order. The sales director said Bowen immediately rejected the order as the FYL would make a loss of $80 per unit on the order. The potential customer then countered offered a price that is 10% discount from the average selling price for a unit of Joy PMD (from the current selling price), on the condition that FYL deliver the order within 2 months (the order quantity represents a quarter of FYL's current annual production capacity). In both scenarios, variable production cost of the order 15 expected to be 40% more than the current variable cost for each unit of Joy PMD as the variable production resources (labour and material) have to be organised to fulfil the unplanned production. All other fixed costs are not expected to change. FYL will also have to prioritise the order and delay shipment of Joy PMDs to current customers 1o the second quarter of the year. Part 11 Required: Use concepts of relevant costing and write a report to Bowen with your team's recommendations. In your report, include the following: (a) Computation of the change in profits from accepting the order for 15,000 units at $520. (k) Computation of the change in profits from accepting an order for 15,000 units at 10% discount. Justifications on which proposal, if either, should be accepted. () Identification of six (6) non-financial factors that should be considered before making a final decision (considering all information from part (a) and (b). (State all relevant assumptions). (28 marks)