After one year using the TopCap system, Jonathan Smith, vice president for marketing at C&C Sports, is convinced that the company could sell even more baseball caps. Apparently, the market demand for plain caps that are suitable for logo embroidery by corporations, fraternities, and other groups is greater than current manufacturers can supply. The potential for C&C Sports to extend its sales of baseball caps beyond the athletic team market is huge.

The initial specifications for the TopCap system required three workers per eight-hour shift to make up to 1,000 caps per day. Based on initial demand forecasts, Jonathan asked Chad Davis, vice president for operations, to make 240,000 caps in the first year the product was offered. Jona than is convinced that C&C could sell at least 480,000 caps per year with the correct investment in marketing.

Exhibit 9.2

Required

a. By how much would annual operating income increase if a second shift was used to produce additional caps? Refer to Exhibit 9.2 for current revenue and cost information. Assume that the relevant range for the fixed costs is 750,000 caps.

b. What additional one-time marketing cost could be justified to increase sales to meet anticipated demand? Remember that there are only 9 years of usable life remaining for the TopCap system and that C&C Sports uses a 12% discount rate.

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Cash Flow Amount Timing Cash Inflows Sales revenue (240,000 caps x $8.00 per cap) $1,920,000 Years 1-10 Cash Outflows Purchase and installation of TopCap system $ 303,525 Year 0 Purchase of direct materials (240,000 caps x $5.00 per cap) $1,200,000 Years 1-10 Direct labor (4 employees x 8 hours/day x $16.00/hour x 3 shifts per day x 5 days/week x 50 weeks/year) $ 384,000 Years 1-10 Variable overhead (240,000 caps x $0.88 per cap) $ 211,200 Years 1-10 Variable selling expense (240,000 caps x $0.05 per cap) $ 12,000 Years 1-10 Fixed expenses $ 50,000 Years 1-10