Question $1$

Forever Young Laboratories Inc. $("$FYL$")$ was started a few years ago by a groep 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 concemed and has arranged a conference call

over Zoom to discuss about profitability. He illustrated that average unit cost will fall with

increase in productice volume. He reasons that this was due to the eompany's fixed cost base.

He exiracied FYL dala to prodace the following table:

"Defined as the fotal of fixed and variable manulacturing costs, divided by the production

volume

FYL currently hes a production ficility with a eipacily of prolacing $601000$ PMD$,$ pC yar.

Bowen explains that if production reaches full capacity, FYL$\text{'}$s profits will soar as all sales

proceseds would not have to resover fixed cosss $($like rent, depreciation, fixed admin and selling

all product $($manufacturing$)$ costs as werage vait cost can help mansyement better conirol coets

and achieve its profits targets. It is his belief that fixed costs is bad for business.

Your tesem is the management acouunting group, ind shortly afler the conference call, your

Controller called a mecting to aditess 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 frice of $$600$ per

unit and Happy, $$700$ par unit.

Pent I

Required:

$($a$)$ Apply cost$-$volume$-$profit aralysis to calculate the break$-$even point in units for each

PMD sold by FYL$.$ Other non$-$manulacturing fixed costs amounlod to $$2,000,000$per

ycar.

$(10$ maks$)$

$($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 basiness as claimed by Bowen.