Phase Two Requirements:

If necessary, revise your Phase One report before moving on to Phase Two.

Based on the cost estimates you developed, conduct a business evaluation on your proposed business.

a. b.

c. d.

e. f.

g.

h.

i.

j. k.

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? 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 12/31/2017 using both (1) the traditional format based on the absorption costing and (2) the contribution format based on the variable costing. Calculate contribution margin per T-shirt and contribution margin ratio.

Calculate the number of T-shirts you need to sell in order to break-even. Calculate the related sales in dollars you need to make in order to break-even. Calculate the number of T-shirts you need to sell in order to make $10,000 target profit for the year.

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. How risky is your business based on these figures? Explain.

If sales could increase by 1,560 shirts, by how much in dollars would net operating income increase? Using the contribution margin concept and DOL approach, by what percentage would net operating income increase (note: do not recalculate net operating income)? 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 correct. 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)?

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

Ignore Question i and j. 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 (1) a traditional format income statement and (2) a contribution format income statement. Are the two net operating income figures the same? Why or why not?

3. Continue k. At what amount would inventory be reported in the balance sheet of 12/31/2017 under (1) the absorption costing and (2) variable costing? Are the two ending inventory figures the same or different? Why?

Preparing Your Report Phase Two:

Submit your REVISED Phase One report with your Phase Two report. Make revisions BEFORE you

start Phase Two.

Business Evaluation a.

a.1 Product cost per t-shirt under absorption costing = $ (Round answer to nearest hundredth) Explanations: a.2 Product cost per t-shirt under variable costing = $ (Round answer to nearest hundredth) Explanations:

b. b.1 (1) Traditional format income statement (absorption costing). List each cost/expense

separately and present your numbers as whole dollars: (Your companys name) Income Statement Traditional Format For the Year Ended 12/31/2017

Sales ..................................................................................... $ Less: Cost of goods sold ....................................................... $ Gross margin ........................................................................ $ Less: Selling and administrative expenses ............................. $ Net operating income ............................................................ $

b.2 (2) Contribution format income statement (variable costing). List each cost/expense separately and present your numbers as whole dollars: (Your companys name)

Income Statement Contribution Format For the Year Ended 12/31/2017 ............................................................................................ $ Less: ........................................................... $ ........................................................... $ $ ............................................................................................. $ Less: ........................................................... $ ........................................................... $ $ Net operating income ............................................................ $

c. Contribution margin ratio (in %) = % (round to the nearest hundredth). Explanations:

d.

d.1 Break-even number of t-shirts per year = T-shirts (round to the nearest whole number)

Explanations:

d.2 Break-even sales in dollars per year = $ (round to the nearest whole number)

Explanations:

e. Number of tee shirts needed to earn $10,000 target profit per year = (round to the nearest

whole number)

Explanations:

f.

f(1.1) Margin of safety (in %) = % (round to the nearest hundredth)

Explanations:

f(1.2) Based on the margin of safety calculated, my business is (choose one): risky / not risky

explain: (note: answer is subjective):

f(2.1) Degree of operating leverage = (round answer to nearest tenth)

Explanations:

f(2.2) Based on the degree of operating leverage calculated, my business is (choose one): vulnerable to changes in the economy / not vulnerable to changes in the economy explain (note: answer is subjective):

g. Net operating income will increase by $ (round to the nearest whole number) Explanations:

Net operating income will increase by % (round to the nearest hundredth)

Explanations: h.1 Contribution format Income Statement with sales = 9,360 T-shirts. (present numbers as whole

dollars) (Your companys name) Income Statement Contribution Format For the Year Ended 12/31/2017 ............................................................................................. $ Less: ........................................................... $ ........................................................... $ $ ............................................................................................. $ Less: ........................................................... $ ........................................................... $ $ Net operating income ............................................................ $

h.2 Net operating income when sales are 7,800 units = $

h.3 Increase in net operating income = $ Same as in g?

Explanations:

h.4 Increase in net operating income = % Same as in g? Explanations:

Projected net operating income (or loss) = $ (round to the nearest whole dollar) Explanations:

To break-even, administrative salary should be = $ (round to the nearest whole dollar) Explanations:

(1) Traditional format income statement (absorption costing): present numbers as whole dollars (Your companys name)

Income Statement Traditional Format For the Year Ended 12/31/2017 Sales ..................................................................................... $ Less: Cost of goods sold $ Gross margin ........................................................................ $ Less: Selling and administrative expenses ............................. $ Net operating income ............................................................ $ (2) Contribution format income statement (variable costing): (present numbers as whole dollars) (Your companys name) Income Statement Contribution Format For the Year Ended 12/31/2017 ............................................................................................. $ Less: ........................................................... $ ........................................................... $ $ ............................................................................................. $ Less: ........................................................... $ ........................................................... $ $ Net operating income ............................................................ $

(3) The two net operating income figures are (choose one): the same / different Explain

3.(1) Under absorption costing, ending inventory at 12/31/17 = $ Explanations:

3.(2) Under variable costing, ending inventory at 12/31/17 = $ Explanations:

3.(3) The two ending inventory figures are (choose one): the same / different Explain

Attached below are my answers for Question 1

Manufacting variable Cost Variable Cost Per Shirt Fixed Cost Rent (90%) $27,000 $3.75 Tshirt Material Cost Storage Unit (Monthly) $125x12- $125 Design ($10k annual, S300 per design x12) $13,600 Depreciation on Computer & Printer Fact. Operation (90% (60003) $1800 Depreciation on heat purchasae machine (45003 Transfer Paper (400/1000 $0.40 Cartridges Ink Jet (50/500) $0.10 Labor Cost to print one shirt 8/10 $0.80 $5.05 $44,025 Total Manufacturing Variable Cost Non-Manufacturing Variable Cost S3,000 $200 Depreciation on Computer & Printer Selling & Admin (10%(60CO3) Cartridges Ink Jet (50/500 115) $0.02 Laser Paper (20/200) $0.10 Wrapping Paper and Box $0.02 Labor Cost to fold and pack (8/20) $0.40 Selling & Admin Exp. $12,000 Insurance $3,600 $4,000 Cost of party (Quarterly 4x$1,000) Non Manufacturing Cost $0.54 $22,800 $5.59 $66,825 Total Non-Manufacturing Variable Cost Yealy Cost Formula Y atbx $66,825 $5.59 Y $66,825+5.59x Net Income: $117,000 Revenue $7,800 x 15 Costys (S66,825+5.59) 7800 S110,427 $6,573 Net Income