The Richmond Shirt Company makes two types of T-shirts: basic and custom. Basic shirts are plain shirts without any screen printing on them. Custom shirts are created using the basic shirts and then adding a custom screen printing design.

Additional information: The company buys cloth in various colors and then makes the basic shirts in two departments, Cutting and Sewing. The company uses a process costing system (weighted-average method) to determine the production cost of the basic shirts. In the Cutting Department, direct materials (cloth) are added at the beginning of the process and conversion costs are added evenly through the process. In the Sewing Department, no direct materials are added. The only additional material, thread, is considered an indirect material because it cannot be easily traced to the finished product. Conversion costs are added evenly throughout the process in the Sewing Department. The finished basic shirts are sold to retail stores or are sent to the Custom Design Department for custom screen printing.The Custom Design Department creates custom shirts by adding screen printing to the basic shirt. The department creates a design based on the customer's request and then prints the design using up to four colors. Because these shirts have the custom printing added, which is unique for each order, the additional cost incurred is determined using job order costing, with each custom order considered a separate job.

For March 2016, the Richmond Shirt Company compiled the following data for the Cutting and Sewing Departments:

Cutting Department

THE RICHMOND SHIRT COMPANY
Production Cost ReportCUTTING DEPARTMENT
Month Ended March 31, 2016
UNITS	Whole Units	Transferred In	Direct Materials	Conversion Costs
Beginning Work in Process	0
Units Started during the Period	1,400
Ending WIP	0
Total Units to Account For	1,400
Beginning Work in Process	0	0	0	0
Units Started and Completed	1,400	1,400	1,400	1,400
Ending WIP	0	0	0	0
Total Units Accounted For	1,400	1,400	1,400	1,400
COSTS	Transferred In	Direct Materials	Conversion Costs	Total Costs
Beginning Work in Process	0	0	0	0
Current Added During Period	0	4,060	1,540	5,600
Ending Work in Process	0	0	0	0
Total Costs to Account For	0	4,060	1,540	5,600
Equivalent Units	0	1,400	1,400
Equivalent Cost per Unit	0	2.90(4,060/1,400)	1.10(1,540/1,400)	4.00 (2.90 + 1.10)
Costs Assigned to Completed Units	0	4,060	1,540	5,600
Costs Assigned to Ending WIP	0	0	0	0
Total Costs Accounted For	0	$4,060	$1,540	$5,600

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Sewing Department:

THE RICHMOND SHIRT COMPANY
Production Cost ReportSEWING DEPARTMENT
Month Ended March 31, 2016
UNITS	Whole Units	Transferred In	Direct Materials	Conversion Costs
Beginning Work in Process	500
Units Transferred in from Cutting	1,400
Total Units	1,900
Units Started and Completed	1,350	1,350	0	1,350
Units in Ending WIP (1,900 - 550)	550	550	0	385 (550*70%)
Total Units	1,900	1,900	0	1,735
COSTS	Transferred In	Direct Materials	Conversion Costs	Total Costs
Beginning Work in Process	2,000	0	500	2,500
Current Added During Period	5,600	0	1,235	6,835
Total Costs to Account For	7,600	0	1,735	9,335
Equivalent Units	1,900	0	1,735
Equivalent Cost per Unit	4.00(7,600/1,900)	0.00	1.00(1,735/1,735)	5.00 (4.00 + 1.00)
Costs Assigned to Completed Units	5,400 (1,350*4)	0	1,350 (1,350*1)	6,750
Costs Assigned to Ending WIP	2,200 (550*4)	0	385 (385*1)	2,585
Total Costs Accounted For	$7,600	0	$1,735	$9,335

For the same time period, the Richmond Shirt Company compiled the following data for the Custom Design Department:

Job	367	368	369	370
Quantity	200	100	400	300
Design Fee	Yes	No	Yes	Yes
Number of Colors Printing	5	4	2	4
Costs:
Basic Shirt ($5)	1,000 (200*5)	500 (100*5)	2000 (400*5)	1500 (300*5)
Design Cost ($90/Order)	90	0	90	90
Printing Cost ($0.80/Color)	800 (200*5*.80)	320 (100*4*.80)	640 (400*2*.80)	960 (300*4*.80)
Total Cost	$1,890	$820	$2,730	$2,550
Average Cost Cost/Shirt	9.45 (1,890/200)	8.20 (820/100)	6.83 (2,730/400)	8.50 (2,550/300)
Sales Price/Shirt	14.18 (9.45*150%)	12.30 (8.20*150%)	10.24 (6.83*150%)	12.75 (8.50*150%)
Total Sales	$2,835	$1,230	$4,095	$3,825

The Richmond Shirt Company has previously determined that creating and programming the design cost $90 per design. This is a one-time charge. If a customer places another order with the same design, the customer is not charged a second time. Additionally, the cost to print is $0.80 per color per shirt.

In addition to the custom jobs, the Richmond Shirt Company sold 1,350 basic shirts (assume the beginning balance in Finished Goods Inventory is sufficient to make these sales, and the unit cost of the basic shirts in Finished Goods Inventory is the same as the unit cost incurred this month). If the company set the sales price at 120% of the cost, determine the sales price per unit, total sales revenue, and the total cost of goods sold for the basic shirts:

Sales Price Per Unit = Cost*120% = 5*120% = $6

Total Sales Revenue = Units Sold*Sales Price Per Unit = 1,350*6 = $8,100

Total Cost of Goods Sold = Units Sold*Cost Per Unit = 1,350*5 = $6,750

Requirement 4. Calculate the total revenue and total cost of goods sold for all sales, basic and custom.

Requirement 5. Assume the company sold only basic shirts (no custom designs) and incurred fixed costs of $700 per month

A. Calculate the contribution margin per unit, contribution margin ratio, required sales in units to break even, and required sales in dollars to break even.

B. Determine the margin of safety in units and dollars.

C. Graph Richmond Shirt Company's CVP relationships. Show the breakeven point, the sales revenue line, the fixed cost line, the total cost line, the operating loss area, and the operating income area.

D. Suppose the Richmond Shirt Company wants to earn an operating income of $500 per month. Compute the required sales in units and dollars to achieve this profit goal.

Requirement 6. The Richmond Shirt Company is considering adding a new product line, a cloth shopping bag with custom screen printing that will be sold to grocery stores. If the current market price of cloth shopping bags is $1.25 and the company desires a net profit of 20%, what is the target cost? The company estimates the full product cost of the cloth bags will be $0.80. Should the company manufacture the cloth bags? Why or why not?