See if you can calculate the indifference point for sales output between the two strategies set out

Question:

See if you can calculate the indifference point for sales output between the two strategies set out in Example 2.7.

Example 2.7

Lethargo plc has recently been formed to produce vacuum cleaners. The business is now
considering which one of two possible strategies should be adopted:
■ Strategy 1: outsource production of all the parts and components needed for the
vacuum cleaners and focus on assembling the parts and distributing the assembled cleaners. Under this strategy, variable operating costs would be 70 per cent of the total
sales output. Fixed costs would be £3 million per year.
■ Strategy 2: make all of the parts and components needed for the vacuum cleaners
and simply buy in the raw materials needed. Under this strategy, variable operating
costs would be 40 per cent of the total sales output. Fixed costs would be £18 million
per year.
The most likely level of sales output under both strategies is £60 million.
We can see that Strategy 1 has a much higher level of operating gearing than Strategy 2.
Let us now consider the effect of these different levels of gearing on operating profit for
different levels of sales output.image text in transcribed

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