Q1. The research department of ABC Limited has recently developed a new product which can be

manufactured using either of two methods. The costs involved under each of these methods are:

Method I: Plant with an estimated useful life of five years and a nil scrap value would be acquired for GH200,000. Fixed expenses (other than depreciation) would amount to GH60,000 per annum and variable costs per unit would be GH35.

Method II: Plant with an estimated useful life of five years and a nil scrap value would be acquired for GH80,000. Fixed expenses (other than depreciation) would amount to GH29,000 per annum and variable costs per unit would be GH45.

The product is to be marketed at GH60 per unit irrespective of the level of sales achieved. The maximum feasible production capacity under either method is 10,000 units.

Working capital requirements are GH40,000 under each method of production and the company depreciate plant on straight line basis.

Required:

a) Determine the number of units which must be produced and sold under either method each year in order to break even. 7 marks

b) Compute the number of units which must be produced and sold under either method each year in order to achieve a target return of 20% on capital invested. (Show workings). 8 marks