QUESTION 3 25 MARKS Sorrento Ltd is a company that manufactures laptops and is listed on the Johannesburg Stock Exchange. Mark Joust is the chief executive officer of Sorrento Ltd and the company pays tax at a rate of 28% of its profits. Sorrento Ltd has been operating in the South African market for ten years with little local or international competition. However, during the past few years several international brands have entered the market. Based on your discussion with the financial manager, you were able to establish that the company has employed a permanent work force for its factory that cannot be retrenched in the short run because of stringent labour laws of the Republic of South Africa. The company had budgeted to produce and sell 1 600 laptop sets in the 31 August 2021 financial year (FY2021). The budgeted cost of each laptop, based on the demand of 1 600 was as follows: Amount (R) Direct materials 1 500 Direct labour 1 000 Variable manufacturing overheads Variable selling expenses Fixed manufacturing overheads Fixed administration expenses 750 500 2 750 2 000 Each laptop is sold at a 50% mark-up on budgeted production cost. In a meeting with investment analysts at the beginning of the FY2021, Mr Joust had predicted that the company's earnings would grow by 12% compared to the FY2020. Unfortunately, sales have been less than expected for the year and total number of laptops sold to date is 1 420, however, production was in line with budget. In a meeting with Mr Joust this morning, he concluded that it would be impossible to ultimately report an increase in earnings as large as predicted unless some drastic action was taken. Accordingly, Mr Joust has ordered that wherever possible, expenditures for the last few months of the FY2021 should be postponed to FY2022 including cutting back on end-of-year advertising and travel. Additionally, Mr Joust ordered the company's financial manager to scrutinize all costs that are currently classified as period costs and reclassify as many as possible as product costs. REQUIRED Marks (a) Prepare the income statement of Sorrento Ltd for the current year (FY2021) using 10 the absorption costing method. (b) What impact will Mr Joust's actions have on the profitability of Sorrento Ltd? Also discuss your concerns (if any) on the actions taken by Mr Joust. Discuss in details. (c) How many laptops should Sorrento Ltd sell in order to earn an after-tax profit of R1 7 026 000? TAL 25

e local or international competition. However, during the past few years several have entered the market. Based on your discussion with the financial manager, yo lish that the company has employed a permanent work force for its factory tha ed in the short run because of stringent labour laws of the Republic of South Afric npany had budgeted to produce and sell 1 600 laptop sets in the 31 August 2 2021). The budgeted cost of each laptop, based on the demand of 1 600 was as A materials abour e manufacturing overheads e selling expenses nanufacturing overheads administration expenses ptop is sold at a 50% mark-up on budgeted production cost. In a meeting with at the beginning of the FY2021, Mr Joust had predicted that the company's ear 12% compared to the FY2020. Unfortunately, sales have been less than expe total number of laptops sold to date is 1 420, however, production was in line wi ng with Mr Joust this morning, he concluded that it would be impossible to ultimat in earnings as large as predicted unless some drastic action was taken. ngly, Mr Joust has ordered that wherever possible, expenditures for the last few should be postponed to FY2022 including cutting back on end-of-year ad dditionally, Mr Joust ordered the company's financial manager to scrutinize all c classified as period costs and reclassify as many as possible as product costs. RED Dronare the income tatamant forconto it for the trant voor ICV-0211 e local or international competition. However, during the past few years several have entered the market. Based on your discussion with the financial manager, yo lish that the company has employed a permanent work force for its factory tha ed in the short run because of stringent labour laws of the Republic of South Afric npany had budgeted to produce and sell 1 600 laptop sets in the 31 August 2 2021). The budgeted cost of each laptop, based on the demand of 1 600 was as A materials abour e manufacturing overheads e selling expenses nanufacturing overheads administration expenses ptop is sold at a 50% mark-up on budgeted production cost. In a meeting with at the beginning of the FY2021, Mr Joust had predicted that the company's ear 12% compared to the FY2020. Unfortunately, sales have been less than expe total number of laptops sold to date is 1 420, however, production was in line wi ng with Mr Joust this morning, he concluded that it would be impossible to ultimat in earnings as large as predicted unless some drastic action was taken. ngly, Mr Joust has ordered that wherever possible, expenditures for the last few should be postponed to FY2022 including cutting back on end-of-year ad dditionally, Mr Joust ordered the company's financial manager to scrutinize all c classified as period costs and reclassify as many as possible as product costs. RED Dronare the income tatamant forconto it for the trant voor ICV-0211