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:

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 is bad for business.
 

Your team is the management accounting group, and shortly after the conference call, your
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

 

 

Required:
(a) 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.

 

(b) 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.

Projected Production Average Cost Per Average Cost Per Joy PMD* (S) Volume Happy PMD* (S) 10,000 435 355 30,000 390 340 40,000 365 330 50,000 325 315 * Defined as the total of fixed and variable manufacturing costs, divided by the production volume