Markefing
Your business will rent a space inside the office to imprint shirts with photos by a famous arfiste who has agreed to design these shirt picture. Your intended customers are kids and young adults. Your company is scheduled to open shop on January 1, 2017.
Cost informafion:
1 The office charges you $2,750 rent per month, which includes ufilifies, cleaning, and maintenance.
2 You will order white, co5on T-shirts from a T-shirt wholesaler. Each T-shirt costs $2.00 to purchase (cost includes taxes, shipping, and handling).
3 You agreed to pay the arfist 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.
4 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 depreciafion should be used.
5 Producfion cost per shirt is $5.20 (ink, etc.)
6 Bags for shirts cost $0.10 each.
7 Students are hired as part-fime workers. On average it takes one labor hour to print 10 shirts. Each worker is paid $10 per hour.
8 Sales personnel are required 80 hours per week and are paid $10 per hour.
9 Business insurance is purchased at a cost of $2,000 per year.
10 Adverfising costs are expected to be $12,000 per year.
Requirements:
1 Name your company
2 What and how much are the variable costs? Present each item in cost per T-shirt basis.
3 What and how much are the ?xed costs? Present each item in total cost per year.
4 Write out the annual cost formula in Y = a + bX format.
5 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 ?rst three months of ?xed expenses. This amount will be your inifial investment in the business. Note that the equipment will be paid in full on the ?rst day of business as well as the ?rst annual payment to the arfist. Other expenses will be paid on a monthly basis .
6 Develop a price using a target price (what are similar T-shirts selling for)
7 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%)
8 Calculate contribufion margin per T-shirt and contribufion margin rafio based on the price you decided upon (either the price from item 6 or 7 above)
9 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 .
10 Prepare a cost/volume/pro?t chart .
11 Based on the esfimated sales level of 12,000 T-shirts for the ?rst year, prepare the company's forecasted funcfional income statement for the year ended on 12/31/2017 .
12 If sales could increase by 10% (to 13,200 T-shirts), by how much in dollars would net operafing income increase? By what percentage would net operafing income increase?
13 Prepare a contribufion format income statement assuming a sales increase of 10%. Compare your new net operafing income with your answer in 11 .
14 Calculate how many T-shirts need to be sold in order to make a $25,000 target pro?t for the year.
15 Based on the assumpfion that the number of shirts calculated in item 14 are made and sold during the ?rst year of business, calculate the margin of safety and the operafing leverage for the business. What do these ?gures tell you about how risky the business is?
16 Prepare a cash budget for the company's ?rst year of operafions 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 inifial cash balance is the amount calculated in #5. You decide to maintain a minimum cash balance of $10,000 at December 31, 2017
17 Calculate the ?rst year's esfimated return on equity based on the sales calculated in item 14 (note that beginning equity will equal the inifial investment in the business calculated in #5).
18 Aher reviewing the budgeted income statement and the esfimated return on equity for the ?rst year of operafions, consider business strategies that will help to improve pro?tability. Describe your strategies clearly and jusfify why you believe the strategies will work. Provide the variable cost per T-shirt, total ?xed cost, selling price per T-shirt, and contribufion margin per T-shirt under your new strategies. Provide the new cost formula. What is the new break even?
19 Aher your thorough analyses of costs, sales, and pro?tability of your T-shirt business throughout this project, what is your overall impression of the future potenfial of the business? Provide a short assessment.