Can someone help me answer the attached accounting questions?
The purpose of this case study is to help you integrate the managerial accounting concepts that
were covered in class and apply them to a real-world business setting.
You will assume the role of an entrepreneur to start a small company. Your company will
rent a retail cart inside the Mall of America to imprint T-shirts with exclusive original designs by
a famous artist who has agreed to design these T-shirt pictures for you each year at a special
discount. Your target customers are affluent teenagers and young adults. Your business is
scheduled to launch on January 1, 2017.
Mall of America charges you $2,750 rent per month, which includes utilities,
cleaning, and maintenance.
You will order white, cotton T-shirts from a T-shirt wholesaler. Each T-shirt costs
$2.00 to purchase (cost includes taxes, shipping, and handling).
You agreed to pay the artist a $3,000 annual contract fee for twelve T-shirt designs.
This same term is renewable for the next 3 years. Each T-shirt picture will only be
used for one year. Therefore, in the second year, 12 new pictures will be designed for
another $3,000 annual contract fee.
Equipment that will be required to be acquired at the start of business includes a
computer, printer, and direct to garment printer. Total cost will be $25,000. The
equipment is expected to last 5 years without salvage value. Straight-line method of
depreciation should be used.
Production cost per shirt is $5.20 (ink, etc.)
Bags for shirts cost $0.10 each.
Students are hired as part-time workers. On average it takes one labor hour to print
10 shirts. Each worker is paid $10 per hour.
Sales personnel are required 80 hours per week and are paid $10 per hour.
Business insurance is purchased at a cost of $2,000 per year.
Advertising costs are expected to be $12,000 per year. Requirements:
Name your company (5 points)
What and how much are the variable costs? Present each item in cost per T-shirt basis
What and how much are the fixed costs? Present each item in total cost per year (5
Write out the annual cost formula in Y = a + bX format (5 points).
Calculate the total amount of cash that will be needed at the start of the business in
order to buy all necessary equipment and machines, purchase sufficient materials and
supplies for 1,000 shirts, and cover the first three months of fixed expenses. This
amount will be your initial investment in the business. Note that the equipment will
be paid in full on the first day of business as well as the first annual payment to the
artist. Other expenses will be paid on a monthly basis (10 points).
Develop a price using a target price (what are similar T-shirts selling for) (5 points).
Develop a price using cost-based pricing and what you would like to see as a return
on your business (i.e. 10%, 15%, 25%) (5 points).
Calculate contribution margin per T-shirt and contribution margin ratio based on the
price you decided upon (either the price from item 6 or 7 above) (5 points).
Based on the price you decided upon, calculate how many T-shirts need to be sold in
order to break-even. Calculate how much sales in dollars are needed to break-even
Prepare a cost/volume/profit chart (10 points).
Based on the estimated sales level of 12,000 T-shirts for the first year, prepare the
company?s forecasted functional income statement for the year ended on 12/31/2017
If sales could increase by 10% (to 13,200 T-shirts), by how much in dollars would net
operating income increase? By what percentage would net operating income
increase? (5 points)
Prepare a contribution format income statement assuming a sales increase of 10%.
Compare your new net operating income with your answer in 11 (10 points).
Calculate how many T-shirts need to be sold in order to make a $25,000 target profit
for the year (5 points).
Based on the assumption that the number of shirts calculated in item 14 are made and
sold during the first year of business, calculate the margin of safety and the operating
leverage for the business. What do these figures tell you about how risky the business
is? (10 points)
Prepare a cash budget for the company?s first year of operations based on the sales
calculated in item 14. Assume all sales are cash sales and that all costs and expenses
are paid in cash. The initial cash balance is the amount calculated in #5. You decide
to maintain a minimum cash balance of $10,000 at December 31, 2017 (15 points).
Calculate the first year?s estimated return on equity based on the sales calculated in
item 14 (note that beginning equity will equal the initial investment in the business
calculated in #5). (5 points).
After reviewing the budgeted income statement and the estimated return on equity for
the first year of operations, consider business strategies that will help to improve
profitability. Describe your strategies clearly and justify why you believe the 19 strategies will work. Provide the variable cost per T-shirt, total fixed cost, selling
price per T-shirt, and contribution margin per T-shirt under your new strategies.
Provide the new cost formula. What is the new break even? (15 points).
After your thorough analyses of costs, sales, and profitability of your T-shirt business
throughout this project, what is your overall impression of the future potential of the
business? Provide a short assessment (10 points).
This question was answered on: Sep 18, 2020
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