KiaSoo Laboratories Inc. ("KSL") started a few years ago by a group of research scientists to market a new vaccine that they had invented and patented. As the technology involved in the vaccine's manufacture is both complex and expensive, the company has been beset by high fixed costs. Dr Adrian Brown, the company's founder, is particularly concerned and has arranged a management conference Zoom call to discuss company profitability. Dr Brown illustrated how average unit cost fell as production volume increased and explained that this was due to the company's fixed cost base. He shared the following data extracted from KSL accounts: * defined as the total of fixed and variable costs, divided by the production volume KSL current production facilities has a capacity of producing 80,000 vaccines doses per year. Dr Brown believes if production reaches full capacity, the profits will soar as all sales proceeds does not have to recover fixed costs (like rent, depreciation, fixed admin and selling expenses) and will contribute to increasing 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. He further claims that fixed costs is bad for business. Your team is the management accounting group, and shortly after the Zoom call, your CFO called a meeting to address the situation. She wants to know how profitability changes with production. The current production and sales volume is 71,000 doses at an average selling price of $460/ dose. The CFO tells your team of a discussion she had recently with Dr Brown where he again emphasised the need to produce up to the company's maximum capacity of 80,000 doses. The CFO understands from the sales director that there is a potential export order for an extra 10,000 doses but the selling price would only be $360. Dr Brown immediately rejected the order as the company would make a loss of $100 per unit on that order. The potential customer then countered offered and wanted a $180 discount (from the current selling price), and provided KSL can meet its order quantity of 20,000 doses (which represents a quarter of KSL's annual production capacity). Part II Use concepts of relevant costing and write a report to the CFO with your team's recommendations. In your report, include the following: (a) Computation of the change in profits from accepting the order for 10,000 doses at $400. (b) Computation of the change in profits from accepting an order for 20,000 doses at $150 discount. Justifications on which proposal, if either, should be accepted. (c) The production capacity at KSL is limited due to the capacity of an ultra violet machine for the last stage of vaccine production. A competitor has spare capacity at its factory near KS facilities a similar ultra violet machine. This competitor is willing to rent a section of its facilities (with the ultra violet machine) to KSL at a cost of $650,000a month, for a minimum of 1 month rental. With this rented facility, KSL will be able to handle 2,500 doses of the current vaccine with no significant increase in production cost other than the rental. Explain, with computation, if the additional information would change your recommendations in part (c). (d) Identification of five (5) non-financial factors that should be considered before making a final decision (considering all information from part (a) to (c). (State all relevant assumptions)
