P6.53B (LO 1, 2, 3) Seaton Ltd. manufactures and sells laptop computers. For its

Question

P6.53B (LO 1, 2, 3) Seaton Ltd. manufactures and sells laptop computers. For its 2020 business plan, Seaton estimated the following: Selling price Variable cost per laptop$300 Annual fixed costs$150,000 Net (after-tax) income $360,000 Tax rate $600 25% The March financial statements reported that sales were not meeting expectations. For the first three months of the year, only 400 units had been sold at the established price. With variable costs staying as planned, it was clear that the 2020 after-tax profit projection would not be reached unless some action was taken. A management committee presented the following mutually exclusive alternatives to the president: 1. Reduce the selling price by $60. The sales team forecasts that, with the significantly reduced selling price, 2,700 units can be sold during the remainder of the year. Total fixed and variable unit costs will stay as budgeted. 2. Lower variable costs per unit by $20 through the use of less expensive direct materials and slightly modified manufacturing techniques. The selling price will also be reduced by $40, and sales of 2,500 units for the remainder of

Explanation / Answer

a.1.

Working:

a.2.  

Working:

b. All the alternatives give the desired operating incomes. But Alternative 1, gives the higherst operating income.

Units os sales required to break-even (30,000 / 300) 100

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