Paktape Manufacturing produces filament packaging tape. In 20X4, Paktape produced and sold 15 million rolls of tape. The company has recently expanded its capacity, so it can now produce up to 30 million rolls per year. Paktape's accounting records show the following results from 20X4: Sale price per roll Variable manufacturing expenses per roll. Variable marketing and administrative expenses per roll. Total fixed manufacturing overhead costs.. Total fixed marketing and administrative expenses. Sales Production. $2.00 $1.00 $0.50 $8,400,000 $600,000 15 million rolls 15 million rolls There were no beginning or ending inventories in 20X4. In January 20X5. Paktape hired a new president. Kevin McDaniel. McDaniel has a one- year contract that specifies he will be paid 10% of Paktape's 20X5 absorption costing operat- ing income, instead of a salary. In 20X5, McDaniel must make two major decisions: Should Paktape undertake a major advertising campaign? This campaign would raise sales to 25 million rolls. This is the maximum level of sales Paktape can expect to make in the near future. The ad campaign would add an additional $3.5 million in marketing and administrative costs. Without the campaign, sales will be 15 million rolls. How many rolls of tape will Paktape produce? At the end of the year, Paktape Manufacturing's Board of Directors will evaluate McDaniel's performance, and decide whether to offer him a contract for the following year. Required Within your group. form two subgroups. The first subgroup assumes the role of Kevin McDaniel, Paktape Manufacturing's new president. The second subgroup assumes the role of Paktape Manufacturing's Board of Directors. McDaniel will meet with the Board of Directors shortly after the end of 20X5 to decide whether he will remain at Paktape. Most of your effort should be devoted to advance preparation for this meeting. Each subgroup should meet sepa- rately to prepare for the meeting between the Board and McDaniel. Kevin McDaniel should: 1. Compute Paktape Manufacturing's 20X4 operating income. 2. Decide whether to adopt the advertising campaign. Prepare a memo to the Board of Directors explaining this decision. Use the memo format outlined in Daily Exercise 22-5. Give this memo to the Board of Directors as soon as possible (before the joint meeting). 3. Assume Paktape adopts the advertising campaign. Decide how many rolls of tape to pro- duce in 20X5. 4. Prepare an absorption costing income statement for 20X5, ending with operating income before bonus. Then compute your bonus separately. The variable cost per unit and the total fixed expenses (with the exception of the advertising campaign) remain the same as in 20X4. Give this income statement and your bonus computation to the Board of Directors as soon as possible (before your meeting with the Board). 5. Decide whether you wish to remain at Paktape for another year. You currently have an offer from another company. The contract with the other company is identical to the one you currently have with Paktape-you will be paid 10% of absorption costing operating income instead of a salary. The Board of Directors should 1. Compute Paktape's 20X4 operating income. 2. Determine whether Paktape should adopt the advertising campaign. 3. Determine how many rolls of tape Paktape should produce in 20x5. 4. Evaluate McDaniel's performance, based on his decisions and the information he pro- vided the Board. (Hint: You may want to prepare a variable costing income statement.) 5. Evaluate the contract's bonus provision. Are you satisfied with this provision? If so. explain why. If not, recommend how it should be 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 Paktape, and if so, the terms of the contract Paktape will offer McDaniel.