Business Description
You will assume the role of an entrepreneur to start a smallcompany. Your company will rent a retail cart inside the Mall ofAmerica to imprint T-shirts with exclusive original designs by afamous artist who has agreed to design these T-shirt pictures foryou each year at a special discount. Your target customers areaffluent teenagers and young adults. Your business is scheduled tolaunch on January 1, 2017.
Cost information:
Mall of America charges you $2,750 rent per month, whichincludes 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 fortwelve T-shirt designs. This same term is renewable for the next 3years. Each T-shirt picture will only be used for one year.Therefore, in the second year, 12 new pictures will be designed foranother $3,000 annual contract fee.
Equipment that will be required to be acquired at the start ofbusiness includes a computer, printer, and direct to garmentprinter. Total cost will be $25,000. The equipment is expected tolast 5 years without salvage value. Straight-line method ofdepreciation 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 onelabor hour to print 10 shirts. Each worker is paid $10 perhour.
Sales personnel are required 80 hours per week and are paid $10per hour.
Business insurance is purchased at a cost of $2,000 peryear.
Advertising costs are expected to be $12,000 per year.
Requirements:
1. Name your company (5 points)
2. What and how much are the variable costs? Present each itemin cost per T-shirt basis (5 points).
3. What and how much are the fixed costs? Present each item intotal cost per year (5 points).
4. Write out the annual cost formula in Y = a + bX format (5points).
5. Calculate the total amount of cash that will be needed at thestart of the business in order to buy all necessary equipment andmachines, purchase sufficient materials and supplies for 1,000shirts, and cover the first three months of fixed expenses. Thisamount will be your initial investment in the business. Note thatthe equipment will be paid in full on the first day of business aswell as the first annual payment to the artist. Other expenses willbe paid on a monthly basis (10 points).
6. Develop a price using a target price (what are similarT-shirts selling for) (5 points).
7. Develop a price using cost-based pricing and what you wouldlike to see as a return on your business (i.e. 10%, 15%, 25%) (5points).
8. Calculate contribution margin per T-shirt and contributionmargin ratio based on the price you decided upon (either the pricefrom item 6 or 7 above) (5 points).
9. Based on the price you decided upon, calculate how manyT-shirts need to be sold in order to break-even. Calculate how muchsales in dollars are needed to break-even (10 points).
10. Prepare a cost/volume/profit chart (10 points).
11. Based on the estimated sales level of 12,000 T-shirts forthe first year, prepare the company’s forecasted functional incomestatement for the year ended on 12/31/2017 (10 points).
12. If sales could increase by 10% (to 13,200 T-shirts), by howmuch in dollars would net operating income increase? By whatpercentage would net operating income increase? (5 points)
13. Prepare a contribution format income statement assuming asales increase of 10%. Compare your new net operating income withyour answer in 11 (10 points).
14. Calculate how many T-shirts need to be sold in order to makea $25,000 target profit for the year (5 points).
15. Based on the assumption that the number of shirts calculatedin item 14 are made and sold during the first year of business,calculate the margin of safety and the operating leverage for thebusiness. What do these figures tell you about how risky thebusiness is? (10 points)
16. Prepare a cash budget for the company’s first year ofoperations based on the sales calculated in item 14. Assume allsales are cash sales and that all costs and expenses are paid incash. The initial cash balance is the amount calculated in #5. Youdecide to maintain a minimum cash balance of $10,000 at December31, 2017 (15 points).
17. Calculate the first year’s estimated return on equity basedon the sales calculated in item 14 (note that beginning equity willequal the initial investment in the business calculated in #5). (5points).
18. After reviewing the budgeted income statement and theestimated return on equity for the first year of operations,consider business strategies that will help to improveprofitability. Describe your strategies clearly and justify why youbelieve the strategies will work. Provide the variable cost perT-shirt, total fixed cost, selling price per T-shirt, andcontribution margin per T-shirt under your new strategies. Providethe new cost formula. What is the new break even? (15 points).
19. After your thorough analyses of costs, sales, andprofitability of your T-shirt business throughout this project,what is your overall impression of the future potential of thebusiness? Provide a short assessment (10 points).
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