RunAway is a local company that custom-prints tech running shirts for organized racing events. The company has been in business for 2 years. Normal demand for the tech running shirts is approximately 650 shirts per event. On average, there are two events per month. The company has the following direct costs per shirt: Direct material (tech shirts) $3.30 Direct labor (printing) $0.50 Direct labor (design) $2.70 Total direct costs $6.50. The company has historically estimated selling price based on the direct cost of providing the tech shirts. Prices reflected a 40% desired profit margin above direct costs. Recently, RunAway has experienced lower-than-normal profits and suspects that the prices it is charging are not covering all costs (direct and indirect) of providing the tech shirts. Indirect costs of the company include depreciation on the printing machines and utilities. The following data from the most recent year relate to these indirect costs:

	Depreciation	Tech Shirts	Utilities
Jan	$500	650	1990
Feb	$500	780	1870
March	$500	980	1890
April	$500	1450	2640
May	$500	1210	2340
June	$500	1400	3390
July	$500	1580	3480
Aug	$500	1610	3560
Sept	$500	1320	2780
Oct	$500	1220	2750
Nov	$500	860	2280
Dec	$500	790	2150

The management accountant estimates the following regression equation with utilities as the dependent variable and the number of tech shirts as the independent variable: y = $689 + $1.65X

1a. Why has RunAway been experiencing lower-than-normal profits? (Round any interim currency calculations to the nearest cent and enter the profit margin percentage to the nearest whole percent, X%.) Runaway has only been earning a(n) -- % profit margin on each tech shirt sold.Profits are lower than normal because RunAway has not been aware of how the -- (choice options: design, direct, indirect,material, printing) costs have been affecting overall profits. The decision to base prices on 40% markup of direct costs has been -- (effective or ineffective) in recovering all costs plus desired profits related to providing the tech shirts.

1b. What price must RunAway charge to recover all costs and earn a 20% margin on all sales? (Round to the nearest cent.) RunAway must charge $--- to earn a 20% margin on all sales.

1c. What implications will a potential price increase have on RunAway and/or its customers? How might the owners address any negative reactions from customers? If RunAway increases its price, they --- (choice options a)may lose, b)will gain, c)will not lose customers). The owners of RunAway --- (Choice options (a)need not worry about communicating the reason for the increase to its customers, b) will need to carefully approach current sutomers and explain that current price increase was necessary to cover all costs.)