Question1

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	Average Cost Per Joy PMD* ($)	Average Cost Per Happy PMD* ($)
10,000	435	355
30,000	390	340
40,000	365	330
50,000	325	315

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.

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).