HOW MANY ROLLS OF TAPE WILL FASTPACK PRODUCE?

CASE 1FASTPACK Manufacturing produces filament packaging tape. In 2007 FASTPACKproduced and sold 15 million rolls of tape. The company has recently expanded itscapacity so it now can produce up to 30 million rolls per year. FASTPACK’saccounting records show the following results from 2007:Sale price per roll $ 3.00Variable manufacturing costs per roll $ 2.00Variable marketing and administrative costs per roll $ 0.50Total fixed manufacturing overhead costs $8 400 000Total fixed marketing and administrative costs $1 100 000Sales 15 million rollsProduction 15 million rollsThere were no beginning or ending inventories in 2007.In January 2008 FASTPACKhired a new president Kevin McDaniel. McDaniel has a one-year contract thatspecifies he will be paid 10% of FASTPACK’s 2008 absorption costing operatingincome instead of a salary. In 2008 McDaniel must make two major decisions:• Should FASTPACK undertake a major advertising campaign? This campaignwould raise sales to 24 million rolls. This is the maximum level of salesFASTPACK can expect to make in the near future. The ad campaign wouldadd 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 willevaluate McDaniel’s performance and decide whether to offer him a contractfor the following year.Requirements Assume the role of Kevin McDaniel FASTPACK Manufacturing’snew president. McDaniel will meet with the Board of Directors shortly after the end of2008 to decide whether he will remain at FASTPACK. Most of your effort should bedevoted to advance preparation for this meeting.Kevin McDaniel should:1.Compute FASTPACK Manufacturing’s 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 assoon as possible (before the joint meeting).3.Assume FASTPACK adopts the advertising campaign. Decide how many rolls oftape to produce in 2008.4.Given your response to Requirement 3 prepare an absorption costing incomestatement for the year ended December 31 2008 ending with operating incomebefore bonus. Then compute your bonus separately. The variable cost per unitand the total fixed costs (with the exception of the advertising campaign)remain the same as in 2007. Give this income statement and your bonuscomputation to the Board of Directors as soon as possible (before your meetingwith the Board).5.Decide whether you wish to remain at FASTPACK for another year. You currentlyhave an offer from another company. The contract with the other company isidentical to the one you currently have with FASTPACK—you will be paid10% of absorption costing operating income instead of a salary.CASE 2Each autumn as a hobby Suzanne Aker weaves cotton placemats to sell through alocal craft shop. The mats sell for $20 per set of four. The shop charges a 10%commission and remits the net proceeds to Aker at the end of December. Aker haswoven and sold 25 sets each of the last two years. She has enough cotton ininventory to make another 25 sets. She paid $7 per set for the cotton. Aker uses afour-harness loom that she purchased for cash exactly two years ago. It isdepreciated at the rate of $10 per month. The accounts payable relate to the cottoninventory and are payable by September 30.Aker is considering buying an eight-harness loom so that she can weave moreintricatepatterns in linen. The new loom costs $1 000; it would be depreciated at$20 per month. Her bank has agreed to lend her $1 000 at 18% interest with $200principal plus accrued interest payable each December 31. Aker believes she canweave 15 linen placemat sets in time for the Christmas rush if she does not weaveany cotton mats. She predicts that each linen set will sell for $50. Linen costs $18per set. Aker’s supplier will sell her linen on credit payable December 31.Aker plans to keep her old loom whether or not she buys the new loom. Thebalance sheet for her weaving business at August 31 2007 is as follows:SUZANNE’AKER ‘WEAVERBalance’Sheet as’of’August’31 ‘2007Assets LiabilitiesCurrent’Assets: Current’Liabilities:Cash $125′ Accounts’Payable $74Inventory’of’Cotton 175’300’Fixed’Assets: Owners’%EquityLoom’ 500′ Owners”Equity 486Accumulated’Depreciation (240)260′ Total’Liabilities’and’Total’Assets $560′ Owners”Equity $560Requirements1.’ Prepare’ a’ cash’ budget’ for’ the’ four’months’ ending’December’ 31 ‘ 2007 ‘for’ two’alternatives:’weaving’the’placemats’in’cotton’using’the’existing’loom ‘and’weaving’the’placemats’in’linen’using’the’new’loom.’For’each’alternative ‘prepare’a’budgeted’income’statement’for’the’four’months’ending’December’31 ‘2007.2.’ On’ the’ basis’ of’ financial’ considerations’ only ‘ what’ should’ Aker’ do?’ Give’ your’reason.3.’What’nonfinancial’factors’might’Aker’consider’in’her’decision?CASE 3A.%Equipment%ReplacementSinclair! Company! is! considering! the! purchase! of! new! equipment! to! perform!operations!currently!being!performed!on!different !less!efficient!equipment.!The!purchase!price!is!$250 000 !delivered!and!installed.!A!Sinclair!production! engineer! estimates! that! the! new! equipment!will! produce!savings!of!$72 000!in!labor!and!other!direct!costs!annually !as!compared!with!the!present!equipment.!She!estimates!the!proposed!equipment’s!economic!life!at!five!years !with!zero!salvage!value.!The!present!equipment!is!in!good!working!order!and!will!last !physically !for!at!least!five!more!years.The! company! can! borrow! money! at! 9! percent ! although! it! would! not! plan! to!negotiate! a! loan! specifically! for! the! purchase! of! this! equipment.! The! company!requires! a! return! of! at! least! 15! percent! before! taxes! on! an! investment! of! this!type.!Taxes!are!to!be!disregarded.!Questions1. Assuming! the! present! equipment! has! zero! book! value! and! zero! salvage!value !should!the!company!buy!the!proposed!equipment?2. Assuming! the! present! equipment! is! being! depreciated! at! a! straightJline!rate! of!10!percent ! that!it!has!a!book! value! of! $135 000! (cost ! $225 000 !accumulated! depreciation ! $90 000) ! and! has! a! zero! net! salvage! value!today !should!the!company!buy!the!proposed!equipment?3. Assuming! the! present! equipment! has! a! book! value! of! $135 000! and! a!salvage! value! today! of! $75 000! and! that!if! retained! for! 5!more! years!its!salvage! value! will! be! zero ! should! the! company! buy! the! proposed!equipment?4. Assume! the! new! equipment! will! save only! $37 500! a! year ! but! that! its!economic! life! is! expected! to! be! 10! years.! If! other! conditions! are! as!described! in! (1)! above ! should! the! company! buy! the! proposed!equipment?B.%Replacement%Following?rlier%ReplacementSinclair! Company! decided! to! purchase! the! equipment! described! in! Part! A!(hereafter!called!“model!A”!equipment).!Two!years!later !even!better!equipment!(called! “model! B”)! comes! on! the! market! and! makes! the! other! equipment!completely! obsolete ! with! no! resale! value. The! model! B! equipment! costs!$500 000!delivered!and!installed !but!it!is!expected!to!result!in!annual!savings!of!$160 000!over!the!cost!of!operating!the!model!A!equipment.!The!economic!life!of!model!B!estimated!to!be!5!years.!Taxes!are!to!be!disregarded.!Questions1. What!action!should the!company!take?2. If!the!company!decides!to!purchase!the!model!B!equipment !a!mistake!has!been! made! somewhere ! because! the! good! equipment ! bought! only! two!years!previously !is!being!scrapped.!How!did!this!mistake!come about?C.?fect%of%Income%TaxesAssume! that! Sinclair! Company! expects! to! pay! income! taxes! of! 40! percent! and!that! a! loss! on! the! sale! or! disposal! of! equipment! is! treated! as! a! capital! loss!resulting! in! a! tax! saving! of! 28! percent! of! the! loss.! Sinclair! uses! an! 8! percent!discount! rate! for! analyses!performed! on! an! afterJtax! basis.!Depreciation! of! the!new!equipment!for!tax!purposes!is!computed!using!the!double!declining!balance!system.!Questions1. Should! the! company! buy! the! equipment! is! the! facts! are! otherwise! the!same!as!those!described!in!Part!A (1)?2. If!the!facts!are!otherwise!the!same!as!those!described!in!Part!A!(2)?3. If!the!facts!are!otherwise!the!same!as!those!described!in!Part!B?D.%Changes%in?rnings%PatternAssume! that! the! savings! are! expected! to! be! $79 500! in! each! of! the! first! three!years!and!$60 750!in!each!of! the!next! two!years !other!conditions!remaining!as!described!in!Part!A!(1).Questions1. What!action!should!the!company!take?2. Why!is!the!result!here!different!from!that!in!Part!A!(1)?3. What!effect!would!the!inclusion!of!income!taxes !as!in!Part!C !have!on!your!recommendation?! (You! are! not! expected! to! perform! any! more!calculations!in!answering!the!question.)CASE 4Rye Financial Services provides banks access to sophisticated financial informationand analysis systems over the Web. The company combines these toolswith access to benchmarking data including e-mail and wirelesscommunications so that banks can instantly evaluate individual loanapplications and entire loan portfolios.Rye Financial Services’ CEO Jon Wise is happy with the company’s growth.To bet- ter focus on client service Wise is considering outsourcing somefunctions. CFO Jenny Lee suggests that the company’s e-mail may be the placeto start. She recently attended a conference and learned that many companieswere outsourcing their e-mail function. Wise asks Lee to identify costs relatedto Rye Financial Services’ in-house Microsoft Exchange e-mail application which has 2 300 mailboxes. This information follows:Variable costs:E-mail license $ 7 per mailbox per monthVirus protection license $ 1 per mailbox per monthOther variable costs $ 4 per mailbox per monthFixed costs:Computer hardware costs $ 94 300 per month$8 050 monthly salary for two information technology staffmembers who work only on e-mail $16 100 per ail!function.2.!>