Five Rings Sports Limited was the brainchild of Adam Rinfrew, a third-year university student in Winnipeg. His idea was to produce T-shirts, sweatshirts, and fleece jackets with a logo that spoofed the Olympic rings. He felt that the Olympic spirit was a key sales motivator every two years, when the Olympics took place, but faded from the collective consciousness in the off- years. He believed that a spoof of the Olympic rings could sell every year, especially if he used high-quality materials in his products.

With this in mind, he began to develop a business plan to outline how his business would be run and how he could make it profitable in the long run. In analyzing the market, Adam deter- mined that many small distributors would be very interested in carrying a product that took advantage of the Olympic spirit, but would sell every year, not just in Olympic years. His analysis indicated that by pricing his products very competitively to the distributors, the company could quickly build a critical mass of sales. Pricing the T-shirts at $6.50 each, the sweatshirts at $16.00, and the fleece jackets at $38.50 would provide a very good margin to the distributors and encourage them to buy his goods.

The next challenge was to source the high-quality materials that he believed would attract new customers and ensure repeat business. He was able to find a small mill that created high-quality materials at a reasonable price. The cost of materials for a T-shirt would be $1.50 each; a sweat- shirt would cost $3.00; a fleece jacket would cost $12.00. These materials, because of their high quality, would make his labour force more efficient and he was convinced that producing his products in Canada would offer a moral advantage as long as the end product was profitable.

Finding a labour force that would be available and able to produce the high-quality garments that he wanted proved to be a difficult task. However, he was able to find an older gentle- man who had worked all his life in the garment business and was interested in taking Adam under his wing to show him how to make it work. Together they identified a training program that would allow them to train young workers and, hopefully, instill in them the pride of workmanship that would be reflected in the end results. Between them, they worked on a manufacturing plan and plant layout to maximize efficiency and create a very favourable work environment. Estimated labour costs for the three products were $2.50 for a T-shirt, $3.00 for a sweatshirt, and $8.00 for a fleece jacket.

When all of the fixed manufacturing costs were estimated, including rent, machinery, and utilities, the manufacturing overhead for the factory would be $300,000. Adam was committed to being the main salesperson for the company, but he realized that he needed at least three salespeople, which would cost $50,000 each for base salary (including benefits) and commissions of 10% of selling price. Based on the manner in which he intended to run the business as a "lean and mean" organization, he expected that all other costs of running the business, including advertising and administration, should be no more than $250,000.

His market analysis revealed that he should expect that T-shirts would make up 50 percent of overall unit sales, while sweatshirts should account for 30 percent of unit sales and the balance would be fleece jackets.

Required:

Adam has approached you to help him prepare the financial analysis of his business plan, since he is not very conversant with numbers. He would like to know what revenues he must generate for each of the products to break even, assuming that he is right in his analysis of the mix of sales he has estimated. He also wants to know what revenues would be necessary for him to withdraw $140,000 per year for himself after paying 40 percent corporate income tax.