Business Description

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.

Cost information:

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:

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 fixed 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 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).

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 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).

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/profit chart (10 points).

11. Based on the estimated sales level of 12,000 T-shirts for the first year, prepare the companys forecasted functional 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 operating income increase? By what percentage would net operating income increase? (5 points)

13. 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).

14. Calculate how many T-shirts need to be sold in order to make a $25,000 target profit for the year (5 points).

15. 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)

***Need Below***

16. Prepare a cash budget for the companys 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).

17. Calculate the first years 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).

18. 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 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).

19. 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).

***2-15 Completed below***

Variable Costs:

Purchase cost per T-shirt

$2.00

Labor

$1.00

Production Cost

$5.20

Bags for Shirts

$0.10

Total variable cost per T-shirt

$8.30

Fixed Costs:

Rent ( $ 2,750 x 12)

$33,000.00

Annual fees of artist

$3,000.00

Depreciation expense

$5,000.00

Salaries of sales peronnel ( 80 x 52 x $ 10)

$41,600.00

Business Insurance

$2,000.00

Advertising Costs

$12,000.00

Total fixed expenses

$96,600.00

Annual Cost Formula:

Y=96,000 +8.3x

Equipment	$25,000.00
Supplies	$7,300.00
Contract	$3,000.00
Fixed Expenses	$23,400.00
Investment	$58,700.00

6	Let similar T-Shirts be selling for	$40.00
	- Launching Discount offered	10.00%
	Target Price	$36.00
7	Total Fixed Expenses	$96,600.00
	Estimated production during the year [1000*4]	4000
	Allocated fixed expenses per unit	$24.15
	+ Variable Cost per unit	$8.30
	+ Markup on cost [(24.15+8.30)*10%]	$3.25
	Cost-based pricing	$35.70
8	Target Price	$36.00
	- Variable Cost per unit	$8.30
	Contribution Margin per unit	$27.70
	Contribution Margin Ratio [27.70 / 36]	76.94%
9	Break Even point (numbers) [$96600 / $27.70]	3487
	Break Even point ($) [$96600 / 76.94%]	$125,545.13
10	Target Price	$36.00
	- Variable Cost per unit	$8.30
	Contribution Margin per unit	$27.70
	x Estimated production during the year [1000*4]	4000
	Total Contribution Margin	$110,800.00
	Total Fixed Expenses	$96,600.00
	Total Profit	$14,200.00

11		Income Statement (ending 12/31/2017)
	Revenue
		(12,000* $36)		$432,000
	Expenses
		Variable Cost	$99,600.00
		Fixed Cost	$96,600.00
				$196,200
	Net Income			$235,800
	Income/t-shirt			$20
12 &13	New Sales Revenue
		13200*36		$475,200.0
	Expenses
		Variable Cost (13200*8.3)	$109,560.00
		Fixed Cost	$96,600.00
				$206,160.0
	Income			$269,040.0
	%age increase in the net operating income		$33,240.00	$0.1
	(this is the answer for Q.No 12)
14	We have taken the price of $36
	Now,
	Price			$36.0
	Variable cost/t-shirt			$8.3
	Contribution/T-shirt			$27.7
	Profit needed			$25,000.0
	Breakeven point			$125,545.1
	Total			$150,545.1
	No. of T-shirt needed to be sold to achieve 25000 profit			5,434.84
				5,435	Rounded off
15	Margin of Safety indicates the amount of sales you'are above the break-even-point
	New Sales Revenue			$150,545.1
	Break-Even-point			$125,545.1
	Margin of Safety			$25,000.0
	Operating Leverage tells you what percentage of total cost is Fixed cost
	In our previous problem,
	Variable cost	5435*8.3		$45,110.5
	Fixed Cost			$96,600.0
	Total Cost			$141,710.5
	Operating Leverage			68.2%
	The firm has a large operating leverage, meaning the firm has to sell a certain number of minimum t-shirts to
	cover its huge fixed cost. On the postive sides it also means that as more and more t-shirts you sell, your cost will
	come down.