FASTPACK Manufacturing produces filament packaging tape. In 2009, FASTPACK produced and sold 15 million rolls of tape. The company has recently expanded its capacity, so it now can produce up to 30 million rolls per year. FASTPACK's accounting records show the following results from 2009:
Sale price per roll $ 3.00
Variable manufacturing costs per roll $ 2.00
Variable marketing and administrative costs per roll $ 0.50
Total fixed manufacturing overhead costs $ 8,400,000.00
Total fixed marketing and administrative costs $ 1,100,000.00
Sales 15 million rolls
Production 15 million rolls
There were no beginning or ending inventories in 2009.
In January 2010, FASTPACK hired a new president, Kevin McDaniel. McDaniel has a one-year contract that specifies he will be paid 10% of FASTPACK's 2010 absorption costing operating income, instead of a salary. In 2010, McDaniel must make two major decisions:
*** Should FASTPACK undertake a major advertising campaign? This campaign would raise sales to 24 million rolls. This is the maximum level of sales FASTPACK can expect to make in the near future. The ad campaign would add an additional $2.3 million in fixed marketing and administrative costs. Without the campaign, sales will be 15 million rolls.
*** How many rolls of tape will FASTPACK produce?
At the end of the year, FASTPACK Manufacturing's Board of Directors will evaluate McDaniel's performance and decide whether to offer him a contract for the following year.
Within your group, form two subgroups. The first subgroup assumes the role of Kevin McDaniel, FASTPACK Manufacturing's new president. The second subgroup assumes the role of FASTPACK Manufacturing's Board of Directors. McDaniel will meet with the Board of Directors shortly after the end of 2010 to decide whether he will remain at FASTPACK. Most of your effort should be devoted to advance preparation for this meeting. Each subgroup should meet separately to prepare for the meeting between the Board and McDaniel.
(Hint : Keep computations other than per-unit amounts in millions)
Kevin McDaniel should:
1. compute FASTPACK Manufacturing's 2009 operating income.
2. decide whether to adopt the advertising campaign. Prepare a memo to the Board of Directors describeing this decision. Give this memo to the Board of Directors as soon as possible (before the joint meeting).
3. assume FASTPACK adopts the advertising campaign. Decide how many rolls of tape to produce in 2010.
4. (given the response to requirement 3) prepare an absorption costing income statement for the year ended December 31, 2010, ending with operating income before bonus. Then compute the bonus separately. The variable cost per unit and the total fixed costs (with the exception of the advertising campaign) remain the same as in 2009. Give this income statement and bonus computation to the Board of Directors as sson as possible (before the meeting with the Board).
5. decide whether he wishes to remain at FASTPACK for another year. He currently has an offer from another company. The contract with the other company is identical to the one he currently has with FASTPACK - he will be paid 10% of absorption costing operating income instead of a salary.
The Board of Directors should:
1. compute FASTPACK's 2009 operating income.
2. determine whether FASTPACK should adapt the advertising campaign.
3. determine how many rolls of tape FASTPACK should produce in 2010.
4. evaluate MCDaniel's performance, based on his decisions and the information he provided the Board. (Hint: You may want to prepare a variable costing income statement.)
5. evaluate the contract's bonus provision. Is the Board satisfied with this provision? If so, describe why. If not, recommend how it should e changed.
After McDaniel has given the Board his memo and income statement, and after the Board has had a chance to evaluate McDaniel's performance, McDaniel and the Board should meet. The purpose of the meeting is to decide whether it is in their mutual interest for McDaniel to remain with FASTPACK, and if so, the terms of the contract FASTPACK will offer McDaniel.