Question

Start-up costs:

1) The Boulevard Mall charges you $2,500 rent per month, which includes utilities, telephone, cleaning, and maintenance. You estimated that 90% of the rent was related to factory operations and 10% was related to selling and administrative activities.

2) You order white, cotton t-shirts from a T-shirt wholesaler. Each T-shirt costs (including taxes, shipping, and handling) $3.75 to purchase.

3) To store T-shirts that were bought, but not yet imprinted, you rent a storage unit. The storage unit costs you $125 per month.

4) You agree to pay your artist friend a $10,000 annual contract fee plus a $300 design fee for each of the 12 T-shirt pictures designed. 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 at $300 each and another $10,000 annual contract fee will be charged.

5) You buy several items before that start of your business:

[a] A computer and a printer: You pay $6,000 (including taxes, shipping and handling) to buy a computer and a printer. You expect both to last about 3 years without salvage value. You will use the straight-line method for depreciation. You estimate that about 90% of the computer and printer will be used for factory operations and 10% will be for selling and administrative activities.

[b] A heat press machine: You pay $4,500 (including taxes, shipping and handling) for a heat press machine. The machine is used for imprinting t-shirts only and is expected to last 3 years without salvage value.

[c] Transfer paper: Each case of transfer paper costs $400 and contains 1,000 sheets of 8.5 11 transfer paper. You expect to use one transfer paper to print one T-shirt.

[d] Ink-jet cartridges: On average, each cartridge costs $50 and can make 500 prints. Each Tshirt requires one print. You also need to print flyers, etc. for selling and administrative purposes. For this non-manufacturing printing, you will print about one page for every 5 Tshirts sold.

[e] Laser paper: You will buy several reams of laser paper to print promotion flyers, etc. Each ream costs $20 and contains 200 sheets of 8.5 11 laser paper.

6) Wrapping paper and box: Each T-shirt costs about $0.20 to wrap and box. Wrapping and boxing are not considered manufacturing.

7) You hire three fellow students as part-time workers. They not only help you operate the machine, but also help fold, wrap and box T-shirts. Sometimes, three of them work at the same time. But, sometimes they don’t because of their different class schedules. On average, printing 10 shirts will take one labor hour. Folding and packaging 20 shirts also will take about one labor hour. You pay each of your workers $8 per hour (I really need to adjust this for recent inflation!). Folding and wrapping are not considered manufacturing.

8) You (the owner) do all the selling and administrative work by yourself. You pay yourself a total of $12,000 per year. 9) To protect your business from legal obligation, you purchase liability insurance that will cost $3,600 per year. 10) You hold four end-of-quarter parties to promote sales of your t-shirts. Each party costs you about $1,000.

Phase One Requirements:

(1) Give your company an attractive name.

(2) What and how much of your costs are variable costs? List your manufacturing and non-manufacturing variable cost items and present each of them in cost per T-shirt basis.

(3) What and how much of your costs are fixed costs? List your manufacturing and nonmanufacturing fixed cost items and present each of them in total cost per year.

(4) Write out your yearly cost formula in Y = a + bX format. Be sure to include both manufacturing costs and non-manufacturing costs in the cost formula.

(5) Assume that you make and sell 7,800 t-shirts in the first year. Use your cost formula to calculate your first year’s total cost. If you sell these t-shirts at $15 each, how much would net profit be in the first year?

To Prepare Your Report: Submit all answers into the appropriate drop box within Blackboard by the assigned due date. Proper formatting of all formal financial statements is one element of grading. One example of an exemplary submission has been included for your review (the data and all calculations have been removed so that only a shell remains, but the formatting is in contact)

Phase Two:

1. Now you have developed your cost estimates, let’s do some evaluations on this proposed business.

a. Continue to assume that 7,800 t-shirts will be made and sold in the first year. What is your product cost per unit under absorption costing? What is your product cost per unit under variable costing?

b. Based on the estimated sales level of 7,800 t-shirts for the first year, prepare your company’s (forecasted) income statement for the year ended on 12/31/2018 using both

(1) the traditional format based on the absorption costing and

(2) the contribution format based on the variable costing

Answer 1

Boulevard Mall
	Business Costs	Product or period costs	Variable or fixed cost	Per unit Variable Annual cost fixed
1	Artist Contract	Product	Fixed	10000
2	Artist Design Fee	Product	Fixed	300
3	Computer/Printer	Product
4	Computer/Printer	Period
5	Depreciation Computer/Printer	Product	Fixed	1800
6	Depreciation Computer/Printer	Period	Fixed	200
7	Depreciation Heat Press machine	Product	Fixed	1500
8	Heat Press Machine	Product
9	Liability Insurance	Period	Fixed	3600
10	Mall Rent	Product	Fixed	2250
11	Mall Rent	Period	Fixed	250
12	Owners shared	Period	Fixed	12000
13	Parties	Period	Fixed	4000
14	Storage unit	Product	Fixed	1500
15	Inkjet Cartridges	Product	Variable	0.1
16	Inkjet Cartridges	Period	Variable	0.02
17	Laser Paper	Period	Variable	0.02
18	Student worker(3)	Period	Variable	0.4
19	Student worker(3)	Product	Variable	0.8
20	T Shirts	Product	Variable	3.75
21	Transfer Paper	Product	Variable	0.4
22	Wrapping Paper/BOX	Period	Variable	0.2
	Fixed(a)	37400
	Variable(b)	5.69
	Y=a+bX
	Y=37400+5.69X
	Y=37400+5.69*7800	81782	Total Mixed cost
	=7800*15	117000	Total Revenue
		35218	Net Profit