Triple X PLC has recently been formed to produce engines to the automotive industry. The business is now considering which one of the two strategies to adopt:

Strategy 1: Outsource production of all parts and component the engines and focus on assembling the parts and distributing the assembled engines. Under this strategy, variable operating costs would be 80% of total sales output. Fixed costs would be $ 2 million per year

Strategy 2: Make all the parts and components for the engines and simply buy the materials needed. Under this strategy, variable operating costs would be 50% of the total sales output. Fixed costs would be $ 20 million per year.

The most likely level of sales output under both strategies is $ 100 million.

Requirement 1: Without any calculations, which strategy has a higher level of operating gearing?

Requirement 2: Which is the indifference point for sales output between the two strategies?

Requirement 3: Calculate the degree of operating gearing for Strategy 1 and for Strategy 2 at the sales level of $ 100 million. Compare and comment on the results.