CASE 1

FASTPACK Manufacturing produces filament packaging tape. In 2007, 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 2007:

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 2007.!In January 2008, FASTPACK

hired a new president, Kevin McDaniel. McDaniel has a one-year contract that

specifies he will be paid 10% of FASTPACKs 2008 absorption costing operating

income, instead of a salary. In 2008, 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 Manufacturings Board of Directors will

evaluate McDaniels performance and decide whether to offer him a contract

for the following year. !

Requirements Assume the role of Kevin McDaniel, FASTPACK Manufacturings

new president. McDaniel will meet with the Board of Directors shortly after the end of

2008 to decide whether he will remain at FASTPACK. Most of your effort should be

devoted to advance preparation for this meeting.

Kevin McDaniel should:

1. Compute FASTPACK Manufacturings 2007 operating income. !

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). !

3. Assume FASTPACK adopts the advertising campaign. Decide how many rolls of

tape to produce in 2008. !

4. Given your response to Requirement 3, prepare an absorption costing income

statement for the year ended December 31, 2008, ending with operating income

before bonus. Then compute your bonus separately. The variable cost per unit

and the total fixed costs (with the exception of the advertising campaign)

remain the same as in 2007. 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 FASTPACK 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 FASTPACKyou will be paid

10% of absorption costing operating income instead of a salary.