PROBLEM: 1) Stoneridge charges you $2,500 rent per month, which includes utiliti

Question

PROBLEM:

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.

Requirements:

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

(2) 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.

(3) 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.

(4) Assume 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?

Phase Two Requirements:

1.

Using “red track changes” revise your Phase One report (i.e. make sure that everything is correct noting that you may not need to revise anything)

2. Based on the cost estimates you developed, conduct a business evaluationon your 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 12/31/2016 using both (1) the traditional format based on the absorption costing and (2) the contribution format based on the variable costing.

c. Calculate contribution margin per T shirt and contribution margin ratio.

d. Calculate the number of T shirts you need to sell in order to break even. Calculate the related sales in dollars you need to make in order to break even.

e. Calculate the number of T shirts you need to sell in order to make $10,000 target profit for the year.

f. Continue to assume that 7,800 T shirts will be made and sold during the first year.

Calculate

your (1) margin of safety and (2) degree of operating leverage (DOL) for your business.

How risky is your business based on these figures? Explain.

g. If sales could increase by 1,560 shirts, by how much in dollars would net operating income increase?

Using the contribution margin concept and DOL approach, by what percentage would net operating income increase ( note: do not recalculate net operating income)?

h. Prepare a contribution format income statement assuming a sales increase by 20% to 9,360 shirts. Compare your new net operating income with your answer in Question “b” and prove mathematically that your answers to the two questions in Question “g” are correct.

i. Ignore Questions “g” and “h”. If the cost per plain shirt is expected to increase by 20% and sales (in number of T shirts) are expected to be 5% less, how much is your projected net operating income (or loss)?

j. Continue Question ‘i”. If the only expense you can cut is the salary paid to yourselves, how much salary should you cut in order to break even?

k. Ignore Question “i” and “j”. Assume that you have produced 7,800 t shirts, but the actual sales for the first year turn out to be 7,000 T shirts instead of 7,800. i.e. you will have 800 T shirts left at the end of the first year. Prepare (1) a traditional format income statement

and (2) a contribution format income statement. Are the two net operating income figures

the same? Why or why not?

3.Continue “k”. At what amount would inventory be reported in the balance sheet of 12/31/2016 under (1) the absorption costing and (2) variable costing? Are the two ending inventory figures the same or different? Why?

Explanation / Answer

Ans 1 and 2 Variable Cost per t shirt Fixed Cost Manufacturing Cost Rent (90%) 2250 Purchase of t-shirt $3.75 Rent a storage unit 125 Designing T shirt 13600 Depreciation on Computer & Printer for factory Operation (90%*(6000/3) 1800 Depreciation on heat purchase machine (4500/3) 1500 Transfer paper (400/100) 0.4 Ink jet cartriage (50/500) 0.1 Labour cost to print one t shirt 8/10 0.8 Manufacturing Cost 5.05 19275 Non manufacturing Cost Rent (10%) 250 Depreciation on Computer & Printer for Selling and administrative (10%*(6000/3) 200 Ink jet cartriage (50/500*1/5) 0.02 Laser paper (20/200) 0.1 Wrapping & Boximg 0.2 Labour cost to fold and pack (8/20) 0.4 Selling & administrativre Expenses 12000 Insurance 3600 Cost of party 1000 Non manufacturing Cost 0.72 17050 Total Cost 5.77 36325 Ans 3 Y=a+bx a=Fixed cost=$36325 B=5.77 Y=36325+5.77x Ans 4 Revenue 7800*15 117000 Cost y=36325+5.77*7800 81331 Net Income 35669 phase 2 Requirement Ans @2 a Product cost per unit under absorption costing 5.05+19275/7800 7.52 per unit Product cost under variable costing 5.77 per unit Dear students there are various subparts in the question I have answered the Req 1 all questions and Req 2 2 Question

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