Teloxy Engineering has received a onetime contract to design and build 10 000 units of a new product. During the proposal process, management felt that the new product could be designed and manufactured at a low cost. Some members felt that it would be more economical to purchase the product for R200 each in the marketplace, with an extra R20 per unit handling of the 10 000 units. The Management team set up a meeting with the manufacturing team to see if they can manufacture the component at a cheaper price than buying it from the outside. The manufacturing team informs them that it can produce a maximum of 10,000 units, just enough to fulfil the contract. The setup cost will be R100 000 and the raw material cost is R120 per component. Since Teloxy has never manufactured this product before, manufacturing expects the following defects:

% defective 0 10 20 30 40

Probability of occurrence (%) 10 20 30 25 15

All defective units must be removed and repaired at a cost of R60 per unit.

1.1. If there is a 20% probability of defective product occurrence during production, determine if it is economically better to make or buy the unit? *Show all your calculations. (20 Marks)

1.2. Teloxy Engineering wants to determine if it should invest in setting up a manufacturing plant worth R12 000 000 or invest in project Theta worth R12 000 000 by applying the payback analysis. The table below shows the initial investment cost of the two projects and their expected revenues. Calculate the payback period of the investments. Determine the outcome If Teloxy management requires a 5 year or less recovery period for the initial investment. (20 Marks)

PROJECT (MANUFACTURING PLANT)			PROJECT (THETHA)
YEAR	OUTLAYS	REVENUE	OUTLAYS	REVENUE
0	12 000 000		12 000 000
1		1 200 000		2 000 000
2		3 400 000		1 270 000
3		5 400 000		6 000 000
4		7 000 000		5 550 000
5		9 050 000		8 000 000