QUESTION 2 (15 MARKS) Elim Manufacturers Ltd (hereafter referred to as The Company) was formed 10 years ago by a group of research scientists to produce and sell vaccines for various infectious diseases. The technology involved in the medicines manufacture is considered to be very complex and expensive and as such, the company is faced with a high level of fixed costs. This is of concern to Mrs Ndou, the companys Chief Executive Officer. She recently arranged an online conference of all senior staff members to discuss the way forward. Mrs Ndou demonstrated to the senior staff members how average unit cost decreases as production volume increased due to the companys heavy fixed cost structure. It is clear that as we produce closer to the factorys maximum capacity of 70 000 packs, the average cost per pack falls. Producing and selling as close to that limit as possible should be good for company profitability. The data she used is reproduced below: Production volume (packs) 40 000 50 000 60 000 70 000 Average cost per unit* R430 R388 R360 R340 Current sales and production volume 65 000 packs Selling price per pack R420 *Defined as the total of fixed and variable costs, divided by the production volume. You are a member of the companies management accounting department and shortly after the online conference, you are called to a meeting with Mr Rossouw, the companys marketing director. He is interested in knowing how profitability changes with production. Mr Rossouw also tells you of a discussion he has recently had with Mrs Ndou where she had again emphasised the need to produce close to the maximum capacity of 70 000 packs. Mr Rossouw is considering the possibility of obtaining an export order for an extra 5 000 packs but because the competition is strong, the selling price would only be R330 per pack. Mrs Ndou is not keen and has suggested that this order should be rejected as it is below cost and so will reduce company profitability. Mr Rossouw is now interested in knowing how profitability changes with production and whether the rejection of the 5 000 pack export order is correct. REQUIRED: In order to assist Mr Rossouw you are required to calculate the following numbers: (a) the amount of the companies fixed costs; (5 marks) (b) the profit of the company at its current sales volume of 65 000 packs; (3 marks) (c) the break-even point in units; (2 marks) (d) the margin of safety expressed as a percentage; (2 marks) (e) the change in profits from accepting the order for 5 000 packs at R330 each. (3 marks) END OF PAPER