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 is a friend of yours. Your friend has agreed to design these T-shirt pictures for you each year at a special discount. Your target customers are teenagers and young adults who have your kind of good taste. Your business is scheduled to launch on January 1, 2017.
Cost information:
Mall of America charges you $2,500 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 $3.00 to purchase (cost includes taxes, shipping, and handling).
To store T-shirts that were bought, but not yet imprinted, you will rent a storage unit. The storage unit costs $75 per month.
You agreed to pay your artist friend 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.
You will buy several items before the start of your business:
Computer and printer - cost $5,000. They are expected to last 3 years without salvage value. Straight-line method of depreciation should be used.
Heat press machine - cost $2,500. The machine is used for imprinting T-shirts only and is expected to last 3 years without salvage value.
Transfer paper - Each case of transfer paper costs $400 and contains 1,000 sheets of 8.5 x 11 transfer paper. One transfer paper is used to print one T-shirt.
Ink-jet cartridges - On average, each cartridge costs $50 and can make 500 prints. Each T-shirt requires one print.
Each T-shirt costs about $0.20 to wrap and box.
Students are hired as part-time workers. On average it takes one labor hour to print 10 shirts. Folding and packaging 20 shirts takes about one labor hour. Each worker is paid $10 per hour.
A liability insurance policy is purchased at a cost of $3,600 per year to protect the business from legal obligations.
Requirements:
1. What and how much are the variable costs? Present each item in cost per T-shirt basis
2. What and how much are the fixed costs? Present each item in total cost per year
3. Write out the annual cost formula in Y = a + b X format