You are an entrepreneur who will be starting a t-shirt business. Your company will rent space inside the mall. You will buy plain t-shirts and imprint them with one of twelve pictures exclusively designed for your company by a famous artist who is a friend of yours. Your target customers are teenagers and young adults and you plan on selling your t-shirts for $15 each. Your business is scheduled to open on January 1, 2020. Below is the cost information for your company:

1. The mall charges you $2,500 rent per month which includes utilities, telephone, cleaning, and maintenance. You estimated that 90% of the rent is related to operations and 10% is related to selling and administrative activities.
2. You will purchase white, cotton t-shirts from a wholesaler for $3.75/shirt.
3. You agree to pay your artist friend a $10,000 annual contract fee for designing 12 new t-shirts each year for your business.
4. You will buy a computer and printer that cost $6,000 which is expected to last 3 years with no salvage value. You will use straight-line depreciation method. You estimate 90% of the computer and printer will be used for operations and 10% will be used for selling and administrative activities.
5. You purchase a heat press machine for $4,500 which is expected to last 3 years with no salvage value. The machine is used only for imprinting the t-shirts.
6. You will purchase transfer paper that cost $400/case and contains 1,000 sheets of transfer paper. One sheet of transfer paper will be used to print one t-shirt.
7. You will purchase ink-jet cartridges that cost $50 and can make 500 prints. Each t-shirt requires one print. You will also need to print flyers for selling and administrative purposes. For this non-manufacturing printing, you will print about flyer for every 5 t-shirts sold.
8. You will purchase laser paper for $20/ream which contains 200 sheets of laser paper.
9. You will hire three part-time employees. You will pay each employee $8/hour. On average printing 10 t-shirts will take one hour of labor.
10. You will do all of the selling and administrative work by yourself and will be paid $12,000/year.
11. To protect your business from legal obligations, you will purchase a liability insurance that cost $3,600/year.

Phase One Requirements:

1. Come up with an attractive name for your business.
2. Determine which and how much of your costs are variable costs. List the manufacturing and non-manufacturing cost items and present each of them in cost per T-shirt basis.
3. Determine which and how much of the costs are fixed costs. List the manufacturing and non-manufacturing costs items and present each of them in total cost per month.
4. Calculate the contribution margin, break-even point, and target profit.

Answers to Phase one: (below)

Calculations of Variable Cost per T-Shirt
Particulars	Manufacturing	Selling	Total
Purchase Price per T-Shirt	$3.75		$3.75
Transfer Paper per T-shirt (Note #1)	$0.40		$0.40
Ink Jet Cartridge (Note #2)	$0.10	$0.02	$0.12
Laser Paper (Note #3)		$0.02	$0.02
Labor	$2.40		$2.40
Totals	$6.65	$0.04	$6.69

• NOTES:
  • Note #1: Transfer Paper $0.04= 400/1000
  • Note #2: Ink Jet Cartridge cost is 50 and make 500 prints
    • Each print requires one t-shirt print and one paper print every 5 units of prints
    • Cost per print $0.12=50/(5/6*500)
  • Note #3: Laser Paper $0.02=20/(200*5)
    • Out of this: 5 prints are for manufacturing expense and 1 print is for non-manufacturing expenses, hence (5/6*0.12) is for manufacturing and rest for variable
  • Note #4: Labor $2.40=8hr*3 employees/10 t-shirts per hour

Calculation of Total Fixed Cost per month
Particulars	Manufacturing	Selling	Total	Total PA
Rent PM	$2,250.00	$250.00	$2,500.00	$30,000.00
Contract Fees	$833.33		$833.33	$10,000.00
Depreciation PM	$150.00	$16.67	$166.67	$2,000.00
Heat Press Machine Depreciation	$125.00		$125.00	$1,500.00
Selling & Manufacture Work		$1,000.00	$1,000.00	$12,000.00
Insurance	$300.00		$300.00	$3,600.00
Total	$3,658.33	$1,266,67	$4,925.00	$59,1000.00

Calculation of Contribution Margin
Particulars	Amount
Revenue	$15.00
Less: Variable Costs	$6.69
Contribution Margin Per Unit	$8.31

Now that you have developed your cost estimates, its time to do some budgeting for your new business.

1. Calculate the total amount of cash you will need to have before opening your business, in order to buy all necessary equipment and machines, to purchase all materials and supplies needed for the first three months of operations, and to pay your employees first three months wages. Assume that your parents have agreed to loan you this amount and only charge you 5% interest each year. The following information regarding cash payment needs for your variable and fixed costs are below:
   1. Variable costs: For every variable cost item, you decide to buy sufficient quantity for making the first 2,000 t-shirts. You also want to prepare sufficient amount of cash to pay for the labor costs needed for making the first 2,000 t-shirts. Assume you can pay your workers for a fraction of an hour but you cannot purchase a fraction of an ink-jet cartridge or a partial case/ream of paper.
   2. Fixed costs: Your initial amount of cash should be sufficient to pay for the first quarters cash needs for your fixed costs. For your fixed cost items, payments will be made according to below:
      1. Rent to the mall will be paid monthly
      2. Full payment to the artist, full payment for the computer and printer, and full payment for heat press machine will need to be made before you open for business.
      3. You will not pay yourself until the end of the first year of operations.
2. Prepare a cash budget for your company for the first year of operations. Assume that the selling price is $15/t-shirt and that 7,800 t-shirts will be made and sold in the first year. Assume all sales are cash sales and that all costs are paid in cash. Your cash balance on January 1 is the amount you are borrowing from your parents (amount calculated in step 1 above). Remember when calculating your manufacturing and selling & administrative expenses, that monthly depreciation on your equipment (i.e. computer & printer and heating press) is not a cash payment. You decide to keep a cash balance of $5,000 at the end of the year. You will use the extra cash to back the loan from your parents including the interest that is owed.
3. Based on the estimated sales level of 7,800 t-shirts for the first year, prepare your companys budgeted income statement for the first year of operations. Remember when calculating your cost of goods sold and selling & administrative amounts, that monthly depreciation on your equipment (i.e. computer & printer and heating press) is an expense to the company.