Reference no: EM132954847

Question

Seaton Ltd. Manufactures and sells laptop computers. For its 2020 business plan, Seaton estimated the following

Selling Price                               $600
Variable cost per laptop          $300
Annual fixed cost                       $150,000
Net (after -tax) income              $360,000
Tax Rate                                        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 cost 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 alternatives to the president.

1. Reduce the selling price by $60. The sales team forecast that with the significantly reduced selling price, 2700 units can be sold during the remainder of the year. Total fixed with variable unit cost 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 the year are forecast.

3. Cut fixes cost by $20,000 and lower the selling price by 5%. Variable cost per unit will be unchanged. Sales of 2,200 units are expected for the remainder of the year.

Required

a. Under the current production policy, determine the number of units the company must sell (1) to break even and (2) to achieve its desired operation income.

b. Determine which alternative the company should select to achieve its desired operating income.