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Marke ng Your business will rent a space inside the o?ce to imprint shirts with photos by a famous ar ste who
has agreed to design these shirt picture. Your intended customers are kids and young adults. Your
company is scheduled to open shop on January 1, 2017. Cost informa on:
1 The o?ce charges you $2,750 rent per month, which includes u li es, cleaning, and
maintenance. 2 You will order white, co on T-shirts from a T-shirt wholesaler. Each T-shirt costs $2.00 to
purchase (cost includes taxes, shipping, and handling). 3 You agreed to pay the ar st 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. 4 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
deprecia on should be used. 5 Produc on cost per shirt is $5.20 (ink, etc.) 6 Bags for shirts cost $0.10 each. 7 Students are hired as part- me workers. On average it takes one labor hour to print 10
shirts. Each worker is paid $10 per hour. 8 Sales personnel are required 80 hours per week and are paid $10 per hour. 9 Business insurance is purchased at a cost of $2,000 per year. 10 Adver sing costs are expected to be $12,000 per year. Requirements:
1 Name your company (5 points) 2 What and how much are the variable costs? Present each item in cost per T-shirt basis (5
points). 3 What and how much are the ?xed costs? Present each item in total cost per year (5
points). 4 Write out the annual cost formula in Y = a + bX format (5 points). 5 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 su?cient materials and supplies
for 1,000 shirts, and cover the ?rst three months of ?xed expenses. This amount will be
your ini al investment in the business. Note that the equipment will be paid in full on the
?rst day of business as well as the ?rst annual payment to the ar st. Other expenses will
be paid on a monthly basis (10 points). 6 Develop a price using a target price (what are similar T-shirts selling for) (5 points). 7 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). 8 Calculate contribu on margin per T-shirt and contribu on margin ra o based on the price
you decided upon (either the price from item 6 or 7 above) (5 points). 9 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 (10 points). 10 Prepare a cost/volume/pro?t chart (10 points). 11 Based on the es mated sales level of 12,000 T-shirts for the ?rst year, prepare the
company?s forecasted func onal income statement for the year ended on 12/31/2017 (10
points). 12 If sales could increase by 10% (to 13,200 T-shirts), by how much in dollars would net
opera ng income increase? By what percentage would net opera ng income increase? (5
points) 13 Prepare a contribu on format income statement assuming a sales increase of 10%.
Compare your new net opera ng income with your answer in 11 (10 points). 14 Calculate how many T-shirts need to be sold in order to make a $25,000 target pro?t for
the year (5 points). 15 Based on the assump on that the number of shirts calculated in item 14 are made and
sold during the ?rst year of business, calculate the margin of safety and the opera ng
leverage for the business. What do these ?gures tell you about how risky the business is?
(10 points) 16 Prepare a cash budget for the company?s ?rst year of opera ons 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 ini al 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). 17 Calculate the ?rst year?s es mated return on equity based on the sales calculated in item
14 (note that beginning equity will equal the ini al investment in the business calculated
in #5). (5 points). 18 A er reviewing the budgeted income statement and the es mated return on equity for
the ?rst year of opera ons, consider business strategies that will help to improve
pro?tability. Describe your strategies clearly and jus fy why you believe the strategies will
work. Provide the variable cost per T-shirt, total ?xed cost, selling price per T-shirt, and
contribu on margin per T-shirt under your new strategies. Provide the new cost formula.
What is the new break even? (15 points). 19 A er your thorough analyses of costs, sales, and pro?tability of your T-shirt business
throughout this project, what is your overall impression of the future poten al of the
business? Provide a short assessment (10 points).
This question was answered on: Sep 18, 2020
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