I really need help with Question #2. I am confused on the wording.

If you can answer any other questions as well-that would be appreciated.

My Shirt, Inc. The Business Situation After graduating with a degree in business from Eastern University in Campus Town, USA, Michael Woods realized that he wanted to remain in Campus Town. After a number of unsuccessful attempts at getting a job in his discipline, Michael decided to go into business for himself. In thinking about his business venture, Michael determined that he had four criteria for the new business: 1. He wanted to do something that he would enjoy. 2. He wanted a business that would give back to the community. 3. He wanted a business that would grow and be more successful every year. 4. Realizing that he was going to have to work very hard, Michael wanted a business that would generate a minimum net income of $25,000 annually. While reflecting on the criteria he had outlined, Michael, who had been president of his fraternity and served as an officer in several other student organizations, realized that there was no place in Campus Town to have custom sweatshirts made using a silk-screen process. When student organizations wanted sweatshirts for their members or to market on campus, the officers had to make a trip to a city 100 miles away to visit \"Shirts and More.'' Michael had worked as a part-time employee at Shirts and More while he was in high school and had envisioned owning such a shop. He realized that a sweatshirt shop in Campus Town had the potential to meet all four of his criteria. Michael set up an appointment with Jayne Stoll, the owner of Shirts and More, to obtain information useful in getting his shop started. Because Jayne liked Michael and was intrigued by his entrepreneurial spirit, she answered many of Michael's questions. In addition, Jayne provided information concerning the type of equipment Michael would need for his business and its average useful life. Jayne knows a competitor who is retiring and would like to sell his equipment. Michael can purchase the equipment at the beginning of 2016, and the owner is willing to give him terms of 50% due upon purchase and 50% due the quarter following the purchase. My Shirt, Inc. Michael decided to purchase the following equipment as of January 1, 2016. Michael has decided to use the sweatshirt supplier recommended by Jayne. Michael learned from talking with Jayne that the supplier is so focused on making quality sweatshirts that many times the shirts are not available for several days. She encouraged Michael to maintain an ending inventory of shirts equal to 25% of the next quarter's sales. He learned that a gross of goodquality sweatshirts to be silk-screened would cost $1,440. Jayne has encouraged Michael to ask the sweatshirt supplier for terms of 40% of a quarter's purchases to be paid in the quarter of purchase, with the remaining 60% of the quarter's purchases to be paid in the quarter following the purchase. Michael also learned from talking with Jayne that the ink used in the silkscreen process costs approximately $0.75 per shirt. Knowing that the silk-screen process is somewhat labor-intensive, Michael plans to hire six college students to help with the process. Each one will work an average of 20 hours per week for 50 weeks during the year. Michael estimates total annual wages for the workers to be $72,000. In addition, Michael will need one person to take orders, bill customers, and operate the cash register. Cary Sue Smith, who is currently Director of Student Development at Eastern University, has approached Michael about a job in sales. Cary Sue knows the officers of all of the student organizations on campus. In addition, she is very active in the community. Michael thinks Cary Sue can bring in a lot of business. In addition she also has the clerical skills needed for the position. Because of her contacts, Michael is willing to pay Cary Sue $1,200 per month plus a commission of 10% of sales. Michael estimates Cary Sue will spend 50% of the workday focusing on sales, and the remaining 50% will be spent on clerical and administrative duties. Michael realizes that he will have difficulty finding a person skilled in computer graphics to generate the designs to be printed on the shirts. Jayne recently hired a graphics designer in that position for Shirts and More at a rate of $500 per month plus $0.10 for each shirt printed. Michael believes he can find a university graphics design student to work for the same rate Jayne is paying her designer. My Shirt, Inc. Michael was fortunate to find a commercial building for rent near the university and the downtown area. The landlord requires a one-year lease. Although the monthly rent of $1,000 is more than Michael had anticipated paying, the building is nice, has adequate parking, and there is room for expansion. Michael anticipates that 75% of the building will be used in the silkscreen process and 25% will be used for sales. Michael's fraternity brothers have encouraged him to advertise weekly in the Eastern University student newspaper. Upon inquiring, Michael found that a 3\" 3\" ad would cost $25 per week. Michael also plans to run a weekly ad in the local newspaper that will cost him $75 per week. Michael wants to sell a large number of quality shirts at a reasonable price. He estimates the selling price of each customized shirt to be $16. Jayne has suggested that he should ask customers to pay for 70% of their purchases in the quarter purchased and pay the additional 30% in the quarter following the purchases. After talking with the insurance agent and the property valuation administrator in his municipality, Michael estimates that the property taxes and insurance on the machinery will cost $2,240 annually; property tax and insurance on display furniture and cash register will total $380 annually. Jayne reminded Michael that maintenance of the machines is required for the silk-screen process. In addition, Michael realizes that he must consider the cost of utilities. The building Michael wants to rent is roughly the same size as the building occupied by Shirts and More. In addition, Shirts and More sells approximately the same number of shirts Michael plans to sell in his store. Therefore, Michael is confident that the maintenance and utility costs for his shop will be comparable to the maintenance and utility costs for Shirts and More, which are as follows within the relevant range of zero to 8,000 shirts. My Shirt, Inc. Michael estimates the number of shirts to be sold in the first five quarters, beginning January 2016, to be: First quarter, year 1 Second quarter, year 1 Third quarter, year 1 Fourth quarter, year 1 First quarter, year 2 8,500 10,000 18,500 13,000 16,000 Michael decides to establish his company as a corporation. He will invest $10,000 of his personal savings in the company. Seeing how determined his son was to become an entrepreneur, Michael's father offered to co-sign a note for an amount up to $20,000 to help Michael open his sweatshirt shop, My Shirt, Inc. However, when Michael and his father approached the loan officer at First Guarantee Bank, the loan officer asked Michael to produce a master budget and estimated financials for 2016. The loan officer advised Michael that the interest rate on a 12-month loan would be 8%. Michael expects the loan to be taken out as of January 1, 2016. The $20,000 loan & related interest accrued will be paid off in 2017. The loan officer also requires that Michael's cash budget have at least $2,000 available cash at the end of each quarter to prevent cash flow problems. To ensure this, the officer will give Michael an open line of credit (in addition to the $20,000 loan). The terms of the agreement require borrowing & repayments to be in $1,000 increments at 8% interest. It is assumed that Michael would borrow from the line of credit on the first day of a quarter and make credit repayments on the last day of a quarter as his cash flow allows. Interest on this line of credit is required to be paid on the last day of each quarter that it accrues. Michael has estimated that his income tax rate will be 20%. He expects to pay the total tax due when his returns are filed in 2017. My Shirt, Inc. Answer the following questions/complete the following items. 1. Do you think it was important for Michael to stipulate his four criteria for the business (see page 1), including the goal of generating a net income of at least $25,000 annually? Why or why not? 2. If the company has sales of $12,000 during January of the first year of business, determine the amount of variable and fixed costs associated with utilities and maintenance using the high-low method for each. (Round unit variable costs to three decimal places where necessary.) 3. Prepare the master budget. Your budget must be prepared in EXCEL in good form. This means clearly labeled and neatly presented. Make sure your format looks professional. Additionally, you must use formulas to create your budget, with an input page and FORMULAS ONLY in the actual budget. I will test your budget by making changes to the assumptions given in the case, and your budget should be able to adjust accordingly or you will NOT be able to earn greater than an 85% on the case. (one exception: financing section of cash budget may have hard codes, but you must highlight cells hard coded) For the master budget to function as intended, you must create an input page on the first page of the excel file and use the second page to build the master budget. A blank master budget template has been provided for you in D2L. 4. In the Excel budget file, on the third sheet, use the information found in the case and the master budget to prepare budgeted financials for My Shirt, Inc. for the year ended December 31, 2016. Your budgeted financials must contain FORMULAS ONLY. You may use information from the master budget and the inputs page as needed for your budgeted financials 5. (a) Using the information contained in the case and the previous budgets, calculate the estimated contribution margin per unit for 2016. (Hint: Silk-screened labor and the taxes are both fixed costs.) (b) Calculate the total estimated fixed costs for 2016 (including interest and taxes). (c) Compute the break-even point in units and dollars for 2016 6. (a) Michael is very disappointed that the company did not have an income of $25,000 for its first year of budgeted operations as he had wanted. How many shirts would the company have had to sell in order to have had a profit of $25,000? (Ignore changes in income tax expense.) (b)Why does the company's net income differ from its ending cash balance? 7. Do you think it was a good idea to offer Cary Sue a salary plus 10% of sales? Why or why not? You will work in your assigned groups for case 2 on this project. Your budget case is due in the D2L drop-box by 6:30pm on THURSDAY, October 13th, 2016