KiaSoo Laboratories Inc. (KSL) started a few years ago by a group of research scientists to...

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KiaSoo Laboratories Inc. ("KSL") started a few years ago by a group of research scientists to market a new vaccine that they had invented and patented. As the technology involved in the vaccine's manufacture is both complex and expensive, the company has been beset by high fixed costs. Dr Adrian Brown, the company's founder, is particularly concerned and has arranged a management conference Zoom call to discuss company profitability. Dr Brown illustrated how average unit cost fell as production volume increased and explained that this was due to the company's fixed cost base. He shared the following data extracted from KSL accounts: Production volume (dose) Average cost per dose* (S) 660 40,000 50,000 60,000 80,000 360 * defined as the total of fixed and variable costs, divided by the production volume 540 460 KSL current production facilities has a capacity of producing 80,000 vaccines doses per year. Dr Brown believes if production reaches full capacity, the profits will soar as all sales proceeds does not have to recover fixed costs (like rent, depreciation, fixed admin and selling expenses) and will contribute to increasing 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. He further claims that fixed costs is bad for business. (b) Your team is the management accounting group, and shortly after the Zoom call, your CFO called a meeting to address the situation. She wants to know how profitability changes with production. The current production and sales volume is 71,000 doses at an average selling price of $460/dose. Part I (c) Apply cost-volume-profit analysis to calculate the company's break-even point in units. (6 marks) Discuss if Dr Brown 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 business as claimed by Dr Brown? (12 marks) Calculate the profit of the company at its current sale volume of 71,000 doses. Calculate the margin of safety (in percentage), and comment on its significance for decision making purposes. (6 marks) KiaSoo Laboratories Inc. ("KSL") started a few years ago by a group of research scientists to market a new vaccine that they had invented and patented. As the technology involved in the vaccine's manufacture is both complex and expensive, the company has been beset by high fixed costs. Dr Adrian Brown, the company's founder, is particularly concerned and has arranged a management conference Zoom call to discuss company profitability. Dr Brown illustrated how average unit cost fell as production volume increased and explained that this was due to the company's fixed cost base. He shared the following data extracted from KSL accounts: Production volume (dose) Average cost per dose* (S) 660 40,000 50,000 60,000 80,000 360 * defined as the total of fixed and variable costs, divided by the production volume 540 460 KSL current production facilities has a capacity of producing 80,000 vaccines doses per year. Dr Brown believes if production reaches full capacity, the profits will soar as all sales proceeds does not have to recover fixed costs (like rent, depreciation, fixed admin and selling expenses) and will contribute to increasing 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. He further claims that fixed costs is bad for business. (b) Your team is the management accounting group, and shortly after the Zoom call, your CFO called a meeting to address the situation. She wants to know how profitability changes with production. The current production and sales volume is 71,000 doses at an average selling price of $460/dose. Part I (c) Apply cost-volume-profit analysis to calculate the company's break-even point in units. (6 marks) Discuss if Dr Brown 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 business as claimed by Dr Brown? (12 marks) Calculate the profit of the company at its current sale volume of 71,000 doses. Calculate the margin of safety (in percentage), and comment on its significance for decision making purposes. (6 marks)

Answer rating: 100% (QA)

a To calculate the companys breakeven point in units we need to use the following formula Breakeven point in units Fixed costs Contribution margin per ... View the full answer