Phase Two:

1. 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 12/31/2022 using both (1) the traditional format based on the absorption costing and (2) 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

   salesindollarsyouneedtomakeinordertobreak-even. (Usebreak-evenformulas.)

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 (1) margin of safety and (2) 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?

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 b and prove mathematically that your answers to the two questions in Question g are c o r r e c t .

9. 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)?