Hello! I need some assistance with these questions, thank you! Cost information:

Question

Hello!

I need some assistance with these questions, thank you!

Cost information:

1) Stoneridge 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 will 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 will rent a storage unit. The storage unit costs you $125 per month.

4) You agreed 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 will buy several items before that start of your business:

[a] A computer and a printer: You will 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 will 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 T-shirts 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 as manufacturing.

7) You will 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 will pay each of your workers $8 per hour. Folding and wrapping are not considered as manufacturing.

8) You (the owners) do all the selling and administrative work by yourselves. You will pay yourselves a total of $12,000 per year (to be divided among all owners).

9) To protect your business from legal obligation, you will purchase a liability insurance that will cost you $3,600 per year.

10) You will hold four end-of-quarter parties to promote sales of your t-shirts. Each party costs you about $1,000

Questions:

d. Calculate how many T-shirts you need to sell in order to break-even. Calculate how much sales in dollars you need to make in order to break-even. (Use break-even formulas.)

e. Calculate how many T-shirts you need to sell in order to make $10,000 target profit for the year. 2

f. Continue to assume that 7,800 T-shirts will be made and sold during the first year. Calculate your margin of safety for your business. What does this figure tell you about how risky your business is?

g. If sales could increase by 1,560 shirts (i.e. a 20% increase), by how much in dollars would net operating income increase? By what percentage would net operating income increase?

Explanation / Answer

Stoneridge charges = $2,500 rent per month = 2500

factory operations = 2500 *90% = 2250

selling and administrative activities = 2500 *10% = 250

Purchase cost of T-shirt(including taxes, shipping, and handling)= $3.75

Storage unit costs = $125 per month

Designing cost = 10000 + 300 = 10300p.a = 10300/12 = 858 monthly

Depreciation on computer and a printer = 6000/3 =2000

factory operations = 2000 *90% = 1800

selling and administrative activities = 2000 *10% = 200

Depreciation on heat press machine = 4500/3 = 1500

transfer paper costs = $400

It contains 1,000 sheets = 400*1000 = 400000

Ink-jet cartridges- cartridge costs $50 and can make 500 prints. = 50*500 = 25000

non-manufacturing printing = one page for every 5 T-shirts sold.

Laser paper: ream costs $20 and contains 200 sheets = 20*200 = 4000

Wrapping paper and box: costs = $0.20 to wrap and box.

printing 10 shirts will take one labor hour.

Folding and packaging 20 shirts also will take about one labor hour.

Pay each of your workers $8 per hour. Folding and wrapping are not considered as manufacturing.

$12,000 per year

Insurance cost = $3,600 per year.

promote sales of t-shirts Each party costs = $1,000, 4 partices = 4*1000 = 4000

T-shirts you need to sell in order to break-even = fixed cost / contribution per unit

= 23458/ 2.43

= 9653.498

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