Case Study 3

Section Case Study: Read "George's T-Shirts" beginning on page 267 and analyze the following questions:

GEORGE'S T-SHIRTS

For the last six years, George Lassiter, a project engineer for a major defense contractor, had enjoyed an interesting and lucrative side businessdesigning, manufacturing, and hawking "special event" t-shirts. He had created shirts for a variety of rock concerts, major sporting events, and special fund-raising events. Although hist-shirts were not endorsed by the event sponsors and were not allowed to be sold within the arenas at which the events were held, they were cleverly designed, well-produced, and reasonably priced(relative to the official shirts). They were sold in the streets surrounding the arenas and in the nearby parking lots, always with the appropriate licenses from the local authorities. Lassiter had a regular crew of vendors to whom he sold the shirts on consignment for $100 per dozen. These vendors then offered the shirts to the public at $10 apiece. A steady stream of t-shirt business came to Lassiter, and he was generally working on several designs in various stages of development. His current problem centered around the number of shirts he should have stenciled for a rock concert that was scheduled to be staged in two months. This concert was almost certain to be a huge success. Lassiter did not doubt that the 20,000 tickets for the standing area around the stage would be instantly bought by the group's devoted fans. The major unknown was the number of grandstand seats that would be sold. It could be anywhere from a few thousand to more than double the number of standing tickets. Given the popularity of the performing group and the intensity of the advance hype, Lassiter believed the grandstand sales were more likely to be at the high rather than the low end of the spectrum. He decided to think in terms of three possibilities (a high, a medium, and a low value), specifically, 80,000, 50,000, and 20,000 grandstand seats. Despite his optimism, he believed that 50,000 was as likely as either of the other two possibilities combined. The two extreme numbers were equally likely; maybe 80,000 was a little more likely than 20,000. A second unknown was the percentage of the attendees who would buy one of his shirts. To the credit of his designs and the quality of the shirts, the number generally (about 6 times out of 10) ran about10 percent of the attendance, but sometimes it was in the range of 5 percent. On a rare occasion, sales would be in the vicinity of 15 percent (maybe 1 time out of 10, if Lassiter's memory served him right). Several weeks ago, Lassiter had requested a cost estimate for this concert's design from the silk screener/shirt supply house with which he had been working for several years. He used this particular firm almost exclusively because he had found it to be reliable in both quality and schedule and to have reasonable prices. The estimate had arrived yesterday. It was presented in the usual batches of 2,500 shirts with the usual volume discounts: Order Size - 10000 , 7500, 5000 Cost - $32,152 , $25,250 , $17,750 The order had to be one of the quoted multiples of2,500 shirts. Based on his volume estimates, Lassiter was prepared to place an order for 5,000 shirts. With his sales generally about 10 percent of attendance, he didn't believe he could justify an order for 7,500 shirts. Such an order would require the concert'sattendancetobe75,000, and while he was optimistic about the event's popularity, he wasn't that pretty optimistic. Also, in the past, he had taken the conservative route, and it had served him well. He had never had an appreciable number of shirts leftover, but those that were left were sold to a discount clothing chain for $1.50 per shirt.

1. What are the possible financial outcomes if Lassiter orders 5000 T-shirts? 7,500? 10,000?

2. How many T-shirts should Lassiter order?