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.

1. 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 the amount calculated in #14. You decide to maintain a minimum cash balance of $10,000 at December 31, 2017 (15 points).

Explanation / Answer

cash budget for the company’s first year of operations Units Per unit Amount in $ Selling price 12000 15 180000 Costs Renal charges of Mall-monthly 2500 12months 30000 Purchase cost of T-shirt 12000 3 36000 Storage cost-Monthly charges 75 12 900 annual contract fee for twelve T-shirt designs 3000 Computer and printer 5000 Heat press machine 2500 Transfer paper cost=400*12000/1000 4800 Ink-jet cartridges cost=50*12000/500 3000 wrap and box 12000 0.2 2400 part-time workers print cost 1hr@10T-shirts=(12000/10)*$10per hr 12000 Folding and packaging cost 6000 1hr@10T-shirts=(12000/10)*$10per h2 Insurance cost 3600 closing cash balance 10000 Total outflow 119200 Opening cash balance (180000-119200) 60800

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