Business Description You will assume the role of an entrepreneur to start a smal

Question

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.

Assume that you will sell 12,000 shirts at $15 each

Based on the estimated sales level of 12,000 T-shirts for the first year, prepare the company’s forecasted income statement for the year ended on 12/31/2017 (10 points).

Explanation / Answer

The forecasted income statement for the Year ending on 12/31/2017 is given below:

Forecasted Income Statement For the Year Ending 12/31/2017 Sales Value (12,000*15) 180,000 Less Purchase of T-Shirts (12,000*3) 36,000 Cost of Labor – Printing (12,000/10*10) 12,000 Cost of Labor – Folding and Packaging (12,000/20*10) 6,000 Cost of Cartridge (12,000*50/500) 1,200 Cost of Wrapping (12,000*.20) 2,400 Cost of Transfer Paper (12,000*400/1,000) 4,800 Storage Cost (75*12) 900 Contract Fee 3,000 Rent of Mall (2,500*12) 30,000 Depreciation on Computer and Printer (5,000/3) 1,667 Depreciation on Heat Press Machine (2,500/3) 833 Cost of Liability Insurance Policy 3,600 Net Income $77,600

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