Moratuwa Ltd was formed three years ago by a group of research scientists to market a new product that they had invented, which takes plastic waste and converts it into building materials. This market has many competitors so Moratuwa strives so provide materials of very high quality that sets them apart from their rivals. The technology involved in the manufacturing is both complex and expensive. Because of this, the company is faced with a high level of fixed costs.

This is of particular concern to Dr Xi, the companys chief executive. She recently arranged a meeting of all management staff to discuss company profitability. Dr Xi showed the managers how average unit cost fell as production volume increased and explained that this was due to the companys heavy fixed cost base. It is clear that as we produce closer to the plant's maximum capacity of 70,000 units, the average cost per unit falls. Producing and selling as close to that limit as possible must be good for the company's profitability.

The budgeted data she used for the forthcoming year is reproduced below.

Expected sales demand and production volume: 65,000 units. Selling price per unit = 420.

You are a member of Moratuwa Ltds management accounting team and shortly after the meeting you are called to a meeting with Ben Okocha, the companys marketing director. He is interested in knowing how profitability changes with production.

Ben Okocha now tells you of a discussion he has recently had with Dr Xi, who had once more emphasised the need to produce as close as possible to the maximum capacity of 70,000 units.

Ben has the possibility of obtaining an order for an extra 5,000 units but, because the competition is strong, the selling price would only be 330. Dr Xi has suggested that this order should be rejected as it is below cost and so will reduce company profitability. However, Dr Xi is interested in another order from a new customer overseas for 15,000 units. She would be prepared on this occasion to sell the units on a cost basis for 340 each as this is a new customer.

a) Calculate the fixed costs in total of the company and the budgeted profit for next year (a full profit statement is not necessary). (6 marks)

b) Calculate the breakeven point and the margin of safety in units. (3 marks)

c) Explain to Dr Xi why the average cost per unit of production is decreasing as production volume increases. (5 marks)

d) Calculate the impact on profit from accepting either the order of 5,000 units or the potential order of 15,000 units. (8 marks)

e) What other factors would you take into account when deciding whether to accept either of the orders? (8 marks)