Question $1$

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:

Projected Production Volume of $10,000$ units:

Average Cost Per Joy PMD$*($$$)-435$

Average Cost Per Happy PMD$*($$$)-355$

Projected Production Volume of $50,000$ units:

Average Cost Per Joy PMD$*($$$)-325$

Average Cost Per Happy PMD$*($$$)-315$

$*$ 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 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.

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 is 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 to the second quarter of the year.

Part II

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.$

$($b$)$ 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.

$($c$)$ 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$).$