Exhibits 2 and 5 show the projected 2009 net income for Pack-A-Card (PAC) as $254,000 and $386,000 when utilizing a seasonal or level production schedule respectively. Upon comparison it seems that utilizing a level production schedule will be much more profitable to PAC. However, because of inherent risks associated with a level production schedule our recommendation is to continue using a seasonal production schedule.
Our recommendation to continue using a seasonal production schedule is based on the following three criteria:
Under level production schedule inventory levels are projected to increase to $2.7 million just before the peak selling season starts. This is a stark contrast when compared with the projected inventory of $375,000 when utilizing a seasonal production schedule. Not only will a high level of inventory incur more storage costs, but it will also require more capital funding.
Currently the line of credit terms state that the loan balance needs to be zero for at least four months of the year. Under a level production schedule there will only be three months with a loan balance of zero. In addition, the current credit limit is set to $2 million. However, based on a level production schedule a projected limit of $2.92 million will be required. If the terms and credit limit are renegotiated the interest rate of 5.5% is likely to increase, which will further increase the already high interest expense under level production.
Line of Credit Amount and Terms