Response to the following problem:
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................................................................................. $ 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
Total fixed marketing and administrative costs............... $ 1,100,000
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, 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.
Questions:
1. Compute FASTPACK's 2009 operating income.
2. Determine whether FASTPACK should adopt the advertising campaign.
3. Determine how many rolls of tape FASTPACK should produce in 2010.