The purpose of this case study is to help you integrate the managerial accountin
ID: 2485404 • Letter: T
Question
The purpose of this case study is to help you integrate the managerial accounting concepts that were covered in class and apply them to a real-world business setting.
Business Description
You will assume the role of an entrepreneur to start a small company. Your company will rent a retail cart inside the Mall of America to imprint T-shirts with exclusive original designs by a famous artist who is a friend of yours. Your friend has agreed to design these T-shirt pictures for you each year at a special discount. Your target customers are teenagers and young adults who have your kind of good taste. Your business is scheduled to launch on January 1, 2017.
Cost information:
Mall of America charges you $2,500 rent per month, which includes utilities, cleaning, and maintenance.
You will order white, cotton T-shirts from a T-shirt wholesaler. Each T-shirt costs $3.00 to purchase (cost includes taxes, shipping, and handling).
To store T-shirts that were bought, but not yet imprinted, you will rent a storage unit. The storage unit costs $75 per month.
You agreed to pay your artist friend 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.
You will buy several items before the start of your business:
Computer and printer – cost $5,000. They are expected to last 3 years without salvage value. Straight-line method of depreciation should be used.
Heat press machine – cost $2,500. The machine is used for imprinting T-shirts only and is expected to last 3 years without salvage value.
Transfer paper – Each case of transfer paper costs $400 and contains 1,000 sheets of 8.5 x 11 transfer paper. One transfer paper is used to print one T-shirt.
Ink-jet cartridges – On average, each cartridge costs $50 and can make 500 prints. Each T-shirt requires one print.
Each T-shirt costs about $0.20 to wrap and box.
Students are hired as part-time workers. On average it takes one labor hour to print 10 shirts. Folding and packaging 20 shirts takes about one labor hour. Each worker is paid $10 per hour.
A liability insurance policy is purchased at a cost of $3,600 per year to protect the business from legal obligations.
Prepare a cash budget for the company’s first year of operations. Assume that the selling price is $15 per shirt and that 12,000 T-shirts will be made and sold in the first year. Assume all sales are cash sales and that all costs and expenses are paid in cash. The initial cash balance is $24,325. You decide to maintain a minimum cash balance of $10,000 at December 31, 2017 (15 points).
Explanation / Answer
sales 12000 15 180000 Fixed Expenses: Less: Variable Cost Rent 2500 12 30000 Tshirt cost including wrap 12000 3.2 38400 Storage Rent 75 12 900 Transfer paper(1000) 12 400 4800 Annual contract 3000 Ink jet Cartridges(500) 24 50 1200 Liability insurance policy 3600 Print(10) 1200 10 12000 Total 37500 Folding and packaging(20) 600 10 6000 Total VC 62400 Contribution 117600 Less: Fixed Cost 37500 Net Income 80100 Cash Budget Opening Balance 24325 Less: Purchase of Computer & printer 5000 Heat Press Machine 2500 Cash Available 16825 Add: Net Income 80100 Closing Cash Balance 96925
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