You will assume the role of an entrepreneur to start a small company. Your company will rent a retail cart inside the Mall of America to imprint T-shirts with exclusive original designs by a famous artist who has agreed to design these T-shirt pictures for you each year at a special discount. Your target customers are affluent teenagers and young adults. Your business is scheduled to launch on January 1, 2017.

Cost information:

Mall of America charges you $2,750 rent per month, which includes utilities, cleaning, and maintenance.

You will order white, cotton T-shirts from a T-shirt wholesaler. Each T-shirt costs $2.00 to purchase (cost includes taxes, shipping, and handling).

You agreed to pay the artist a $3,000 annual contract fee for twelve T-shirt designs. This same term is renewable for the next 3 years. Each T-shirt picture will only be used for one year. Therefore, in the second year, 12 new pictures will be designed for another $3,000 annual contract fee.

Equipment that will be required to be acquired at the start of business includes a computer, printer, and direct to garment printer. Total cost will be $25,000. The equipment is expected to last 5 years without salvage value. Straight-line method of depreciation should be used.

Production cost per shirt is $5.20 (ink, etc.)

Bags for shirts cost $0.10 each.

Students are hired as part-time workers. On average it takes one labor hour to print 10 shirts. Each worker is paid $10 per hour.

Sales personnel are required 80 hours per week and are paid $10 per hour.

Business insurance is purchased at a cost of $2,000 per year.

Advertising costs are expected to be $12,000 per year.

Requirements:

What and how much are the variable costs? Present each item in cost per T-shirt basis

What and how much are the fixed costs? Present each item in total cost per year

Write out the annual cost formula in Y = a + bX format

Calculate the total amount of cash that will be needed at the start of the business in order to buy all necessary equipment and machines, purchase sufficient materials and supplies for 1,000 shirts, and cover the first three months of fixed expenses. This amount will be your initial investment in the business. Note that the equipment will be paid in full on the first day of business as well as the first annual payment to the artist. Other expenses will be paid on a monthly basis

Develop a price using a target price (what are similar T-shirts selling for)

Develop a price using cost-based pricing and what you would like to see as a return on your business (i.e. 10%, 15%, 25%)

Calculate contribution margin per T-shirt and contribution margin ratio based on the price you decided upon (either the price from item 6 or 7 above)

Based on the price you decided upon, calculate how many T-shirts need to be sold in order to break-even. Calculate how much sales in dollars are needed to break-even

Prepare a cost/volume/profit chart

Based on the estimated sales level of 12,000 T-shirts for the first year, prepare the companys forecasted functional income statement for the year ended on 12/31/2017

If sales could increase by 10% (to 13,200 T-shirts), by how much in dollars would net operating income increase? By what percentage would net operating income increase?

Prepare a contribution format income statement assuming a sales increase of 10%. Compare your new net operating income with your answer in 11

Calculate how many T-shirts need to be sold in order to make a $25,000 target profit for the year

Based on the assumption that the number of shirts calculated in item 14 are made and sold during the first year of business, calculate the margin of safety and the operating leverage for the business. What do these figures tell you about how risky the business is?

Prepare a cash budget for the companys first year of operations based on the sales calculated in item 14. Assume all sales are cash sales and that all costs and expenses are paid in cash. The initial cash balance is the amount calculated in #5. You decide to maintain a minimum cash balance of $10,000 at December 31, 2017

Calculate the first years estimated return on equity based on the sales calculated in item 14 (note that beginning equity will equal the initial investment in the business calculated in #5).

***This part is needed The above has been provided below***

After reviewing the budgeted income statement and the estimated return on equity for the first year of operations, consider business strategies that will help to improve profitability. Describe your strategies clearly and justify why you believe the strategies will work. Provide the variable cost per T-shirt, total fixed cost, selling price per T-shirt, and contribution margin per T-shirt under your new strategies. Provide the new cost formula. What is the new break even?

After your thorough analyses of costs, sales, and profitability of your T-shirt business throughout this project, what is your overall impression of the future potential of the business? Provide a short assessment

Completed Portion:

Variable Costs per Unit:

	$
Purchase cost per T -shirt	2.00
Direct Labor	1.00
Production Cost	5.20
Bags for Shirts	0.10
Total variable cost per T-shirt	9.20

Fixed Costs per annum:

	$
Rent ( $ 2,750 x 12)	33,000
Annual fees of artist	3,000
Depreciation expense	5,000
Salaries of sales peronnel ( 80 x 52 x $ 10)	41,600
Business Insurance	2,000
Advertising Costs	12,000
Total fixed expenses	96,600

Alternatively, if salaries for sales personnel is treated as a variable expense, variable expenses per T -Shirt would increase by $ 1.00 to $ 10.20. Fixed costs per annum would decrease to $ 55,000.

Annual Cost Formula :

Y = 96,600 + 9.2 x

Let the price per T-shirt be $ 18.40

Contribution Margin per T - Shirt = Unit selling price - Unit variable cost = $ ( 18.40 - 9.20) = $ 9.20

Contribution Margin Ratio = Contribution Margin / Selling Price = $ 9.20 / $ 18.40 = 50%

Break-even point in units = Fixed Costs / Unit contribution margin = $ 96,600 / $ 9.2 = 10,500 units

Break-even point in sales dollars = 10,500 x $ 18.40 = $ 193,200

Forcasted Income Statement ( 12,000 T -Shirts) :

		$
Sales Revenue ( 12,000 x $ 18.40)		220,800
Cost of Goods Sold
Variable ( 12,000 x $ 9.10)	109,200
Fixed	8,000	117,200
Gross Profit		103,600
Selling and Administrative expenses
Variable ( 12,000 x $ 0.10)	1,200
Fixed	88,600	89,800
Operating Income		13,800

Computation of operating income, if sales increase by 10% (to 13,200 T-shirts

		$
Sales Revenue ( 13,200 x $ 18.40)		242,880
Cost of Goods Sold
Variable ( 13,200 x $ 9.10)	120,120
Fixed	8,000	128,120
Gross Profit		114,760
Selling and Administrative expenses
Variable ( 13,200 x $ 0.10)	1,320
Fixed	88,600	89,920
Operating Income		24,840

Net operating income increase by 24,840 13,800 = 11,040

By what percentage would net operating income increase?

% of net operating income for 12,000 sales = 13,800 / 220,800 = 0.0625 =6.25%

% of net operating income for 13,200 sales = 24,840 / 242,880 = 0.1023 = 10.27% percentage of net operating income increase = 10.27% - 6.25% = 4.02%

Computation of contribution format income statement assuming a sales increase of 10%.

		$
Sales Revenue ( 13,200 x $ 18.40)		242,880
Less: Variable cost
Cost of Goods Sold ( 13,200 x $ 9.10)	120,120
Selling and Administrative expenses (13,200 x $ 0.10)	1,320	121,440
Contribution		121,440

Contribution margin = 121,440 / 242,880 = 0.5

Contribution per unit = 121,440 / 13,200 = 9.2

Computation of number of T-shirts needs to be sold in order to make a $25,000 target:

Formula to find target sales = fixed cost + target profit / Contribution per unit

= (8,000 + 88,600) + 25,000 / 9.2 = 13,217 units

If we assume 13,200units are sold during first year then , Margin of safety = Total sales Break even sales

= 13,200 10,500 = 2,700 units are Margin of safety units.

Break even sales = Fixed cost / Unit contribution margin = $ 96,600 / $ 9.2 = 10,500 units

Statement showing cash budget for the companys first year of operations based on the sales i.e., 13,200units.

Opening balance Fixed cost = (96,600-5,000 + 25,000) *3 / 12 = 22,900 1,000units * variable cost $9.2 = 9,200 Cost of equipment = 25,000	57,100
Add: Cash sales	242,880
Less: cash expenses {121,440 +(96,600 5,000)}	(311,070)
Purchase of equipment	(25,000)
Closing balance	(36,090)
Minimum cash balance required	10,000
Cash borrowed	46,090
Closing balance (46,090 36,0900)	10,000

Calculate the first years estimated return on equity based on the sales calculated in item 14 (note that beginning equity will equal the initial investment in the business calculated in #5).

Return on equity = Net operating income / equity

= 13,800 / 57,100 = 0.2417 = 24.17%