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. FASTPACKs accounting records show the following results from 2009: Sale price per roll RM3.00 Variable manufacturing costs per roll RM2.00 Variable marketing and administrative costs per roll RM0.50 Total fixed manufacturing overhead costs RM8,400,000 Total fixed marketing and administrative costs RM1,100,000 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, Mr. Kevin Steve. Mr. Kevin has a one-year contract that specifies he will be paid 10% of FASTPACKs 2010 absorption costing operating income, instead of a salary. In 2010, Mr. Kevin 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 RM2.3 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 Manufacturings Board of Directors will evaluate Kevins performance and decide whether to offer him a contract for the following year.
Required: Mr. Kevin Steve should: 1. Compute FASTPACK Manufacturings 2009 operating income. (4 marks) 2. Decide whether to adopt the advertising campaign. Prepare a memo to the Board of Directors explaining this decision. Give this memo to the Board of Directors as soon as possible (before the joint meeting). (10 marks) 3. Assume FASTPACK adopts the advertising campaign. Decide how many rolls of tape to produce in 2010. (2 marks) 4. (Given the response to Question 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 soon as possible (before the meeting with the Board). (7 marks) 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 currently has with FASTPACKhe will be paid 10% of absorption costing operating income instead of a salary. (2 marks) (Total: 25 marks)