Business Description: You will assume the role of a young entrepreneur eager to start a small company. As a start up company, your plan is as follows:

Rent a retail kiosk inside the Galleria Mall Purchase T-shirts to sell Each shirt will be imprinted with one of twelve beautiful pictures exclusively designed for your company by a famous artist who is a friend of yours. He has agreed to design twelve super attractive T-shirt pictures for you each year at a special discount. Your target customers are teens and young adults who have your kind of good taste. Your business is scheduled to launch on January 1, 2 0 20 .

Start-up costs: 1) The Galleria Mall charges you $2,500 rent per month, which includes utilities, telephone, cleaning, and maintenance. You estimated that 90% of the rent was related to factory operations and 10% was related to selling and administrative activities.

2) You order white, cotton t-shirts from a T-shirt wholesaler. Each T-shirt costs (including taxes, shipping, and handling) $3.75 to purchase.

3) To store T-shirts that were bought, but not yet imprinted, you rent a storage unit. The storage unit costs you $125 per month.

4) You agree to pay your artist friend a $10,000 annual contract fee plus a $300 design fee for each of the 12 T-shirt pictures designed. 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 at $300 each and another $10,000 annual contract fee will be charged.

5) You buy several items before that start of your business: [a] A computer and a printer: You pay $6,000 (including taxes, shipping and handling) to buy a computer and a printer. You expect both to last about 3 years without salvage value. You will use the straight-line method for depreciation. You estimate that about 90% of the computer and printer will be used for factory operations and 10% will be for selling and administrative activities.

[b] A heat press machine: You pay $4,500 (including taxes, shipping and handling) for a heat press machine. The machine is used for imprinting t-shirts only and is expected to last 3 years without salvage value.

[c] Transfer paper: Each case of transfer paper costs $400 and contains 1,000 sheets of 8.5 11 transfer paper. You expect to use one transfer paper to print one T-shirt.

[d] Ink-jet cartridges: On average, each cartridge costs $50 and can make 500 prints. Each Tshirt requires one print. You also need to print flyers, etc. for selling and administrative purposes. For this non-manufacturing printing, you will print about one page for every 5 Tshirts sold.

[e] Laser paper: You will buy several reams of laser paper to print promotion flyers, etc. Each ream costs $20 and contains 200 sheets of 8.5 11 laser paper.

6) Wrapping paper and box: Each T-shirt costs about $0.20 to wrap and box. Wrapping and boxing are not considered manufacturing.

7) You hire three fellow students as part-time workers. They not only help you operate the machine, but also help fold, wrap and box T-shirts. Sometimes, three of them work at the same time. But, sometimes they dont because of their different class schedules. On average, printing 10 shirts will take one labor hour. Folding and packaging 20 shirts also will take about one labor hour. You pay each of your workers $8 per hour (Obviously not adjusted for recent inflation!). Folding and wrapping are not considered manufacturing.

8) You (the owner) do all the selling and administrative work by yourself. You pay yourself a total of $12,000 per year (again, obviously not adjusted for recent inflation).

9) To protect your business from legal obligation, you purchase liability insurance that will cost $3,600 per year.

10) You hold four end-of-quarter parties to promote sales of your t-shirts. Each party costs you about $1,000.

NEED ANSWERED:

G. If sales could increase by 1,560 shirts (i.e. a 20% increase), by how much in dollars would net operating income increase? By what percentage would net operating income increase?

H. Prepare a contribution format income statement assuming a sales increase by 20% to 9,360 shirts. Compare your new net operating income with your answer in Question b and prove mathematically that your answers to the two questions in Question g are c o r r e c t .

I. Ignore Questions g and h. If the cost per plain t-shirt is expected to increase by 20% and sales (in number of T-shirts) are expected to be 5% less, how much is your projected net operating income (or loss)?