Delco Manufacturers is planning to introduce a new product in the next period 2021.

It is expected that 12000 units can be sold at a selling price of 70.

The production manager has put forward two possible production methods. The following financial information has been prepared for each of the alternatives.

Alternative A alternative b Capital Expenditure 900,000 600,000 Maximum Capacity(units) 16000 13000 Unit Cost Direct Materials. 14 14 Direct Labour 12 16 Variable Production Cost 6 10

Fixed Production Cost 800,000 200,000

Required a) For each of the alternatives determine i) Breakeven point in units ii) Breakeven point in revenue iii) The Margin of Safety b) Determine the profit made under each alternative i) 1200 units are produced and sold. ii) Output is 15% below forecast i.e. 10200 units iii) Output is 15% above forecast i.e. 13800 units

c) Determine the number of units that would have to be produced and sold under each alternative if the company wished to earn a 25% return on its investment. d) Explain what is meant by operational gearing utilising your answer from part (b)

e) If you are advised that the company are risk averse, advise the Management as to which of the production methods to adopt, fully justify your answer utilising the calculations from parts (a) to (c).