LIST OF VARIABLE COSTS	Cost per T shirt
		Manufacturing Variable Costs:
		Cost of T shirt	$3.75
		Cost of transfer paper for printing	$0.40
		Cost of inkjet cartridge(manufacturing)	$0.10
		Direct labor-printing	$0.80
		Total Manufacuring Variable	$5.05
		Non Manufacturing Variable Costs:
		Cost of inkjet cartridge(selling &admin)	$0.02
		Wrapping & Box(Selling & admin)	$0.20
		Folding & Wrapping(Selling & admin)	$0.40
		Total Non- Manufacuring Variable	$0.62
		Total Variable Costs=(5.05+0.62)	$5.67
	(3)	FIXED COSTS		Total Cost/Year
		Manufacturing Fixed costs:
		Rent (Factory)		$27,000
		T shirt storage		$1,500
		Cost of design		$13,600
		Depreciation of computer(manufacturing)		$1,800
		Depreciation of heatpress machine(factory)		$1,500
		Total Manufacturing Fixed Costs		$45,400
		Non Manufacturing Fixed Costs:
		Rent(selling & admin)		$3,000
		Depreciation of computer(selling&admin)		$200
		Laser paper(Selling & admin)		$200
		Selling and administration salaries		$12,000
		Liability Insurance cost		$3,600
		Sales promotion cost		$4,000
		TotalNon-manufacturing Fixed Costs		$23,000
		Total Fixed Costs(45400+23000)		$68,400
	(4)	Annual Cost formula :
		Y=a+bX
		Y=annual Cost
		a=Annual Fixed cost=68400
		b=Variable cost per unit=5.67
		X=Annula number of T shirts sold
		Y=68400+5.67X
	(5)	Calculation of Profit in the first Year
		Number of T-shirts sold=7800
		Sales price=$15 each
		Sales Revenue(15*7800)	$117,000
		Less: Variable Cost(5.67*7800)	$44,226
		Contribution Margine	$72,774
		Less: Fixed Costs	$68,400
		Profit	$4,374

Section Two Requirements: Now you have developed your cost estimates, lets do some evaluations on this proposed business.

1. Continue to assume that 7,800 t-shirts will be made and sold in the first year. What is your product cost per unit under absorption costing? What is your product cost per unit under variable costing?

2. Based on the estimated sales level of 7,800 t-shirts for the first year, prepare your companys (forecasted) income statement for the year ended on 12/31/2020 using both (a) the traditional format based on the absorption costing and (b) the contribution format based on the variable costing.

3. Calculate contribution margin per T-shirt and contribution margin ratio.

4. Calculate how many T-shirts you need to sell in order to break-even. Calculate how much sales in dollars you need to make in order to break-even. (Use break-even formulas.)

5. Calculate how many T-shirts you need to sell in order to make $10,000 target profit for the year.

6. Continue to assume that 7,800 T-shirts will be made and sold during the first year. Calculate your (a) margin of safety and (b) degree of operating leverage (DOL) for your business. What do these figures tell you about how risky your business is?

7. 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? (Use the quick way, i.e. contribution margin concept and DOL, you have learned in class to answer these questions. Do not recalculate net operating income.)

8. 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 2 and prove mathematically that your answers to the two questions in Question 7 are correct.

9. Ignore Questions 7 and 8. 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)?

10. Continue Question 9. If the only expense you can cut is the salary paid to yourselves, how much salary should you cut in order to break even?

11. Ignore Question 9 and 10. Assume that you have produced 7,800 t-shirts, but the actual sales for the first year turn out to be 7,000 T-shirts instead of 7,800. I.e. you will have 800 T- shirts left at the end of the first year. Prepare (a) a traditional format income statement and (b) a contribution format income statement. Are the two net operating income figures the same? Why or why not?

12. Continue 11. At what amount would inventory be reported in the balance sheet of 12/31/2020 under (a) the absorption costing and (b) variable costing? Are the two ending inventory figures the same or different? Why?