Question

You are an entrepreneur who will be starting a t-shirt business. Your company will rent space inside the mall. You will buy plain t-shirts and imprint them with one of twelve pictures exclusively designed for your company by a famous artist who is a friend of yours. Your target customers are teenagers and young adults and you plan on selling your t-shirts for $15 each. Your business is scheduled to open on June 1, 2019. Below is the cost information for your company:

1. The mall charges you $2,500 rent per month which includes utilities, telephone, cleaning, and maintenance. You estimated that 90% of the rent is related to operations and 10% is related to selling and administrative activities.
2. You will purchase white, cotton t-shirts from a wholesaler for $3.75/shirt.
3. You agree to pay your artist friend a $10,000 annual contract fee for designing 12 new t-shirts each year for your business.
4. You will buy a computer and printer that cost $6,000 which is expected to last 3 years with no salvage value. You will use straight-line depreciation method. You estimate 90% of the computer and printer will be used for operations and 10% will be used for selling and administrative activities.
5. You purchase a heat press machine for $4,500 which is expected to last 3 years with no salvage value. The machine is used only for imprinting the t-shirts.
6. You will purchase transfer paper that cost $400/case and contains 1,000 sheets of transfer paper. One sheet of transfer paper will be used to print one t-shirt.
7. You will purchase ink-jet cartridges that cost $50 and can make 500 prints. Each t-shirt requires one print. You will also need to print flyers for selling and administrative purposes. For this non-manufacturing printing, you will print about flyer for every 5 t-shirts sold.
8. You will purchase laser paper for $20/ream which contains 200 sheets of laser paper.
9. You will hire three part-time employees. You will pay each of your employees $8/hour. On average printing 10 t-shirts will take one hour of labor.
10. You will do all of the selling and administrative work by yourself and will be paid $12,000/year.
11. To protect your business from legal obligations, you will purchase a liability insurance that cost $3,600/year.

Requirements

1. Come up with an attractive name for your business.
2. Determine which and how much of your costs are variable costs. List your manufacturing and non-manufacturing cost items and present each of them in cost per t-shirt basis.
3. Determine which and how much of your costs are fixed costs. List your manufacturing and non-manufacturing costs items and present each of them in total cost per month.
4. Calculate the contribution margin, break-even point, and target profit.

**Use the spreadsheet

Answer 1

Calculation of variable cost Per T-shirt
Particulars	Manufacturing	Selling	Total
Purchase price per tshirt	$               3.75		$        3.75
Transfer paper per tshirt	$               0.40		$        0.40
Ink jrt cartridge	$               0.10	$        0.02	$        0.12
Laser paper		$        0.02	$        0.02
Labour	$               2.40		$        2.40
Total	$               6.65	$        0.04	$        6.69
Working-
(a)Transfer page	=400/1000
(B) Ink jet cartridge cost is $50 and makes 500 print.
Each print requires one t-shirt print and one paper print every 5 units of print.
Hence for 5 t-shirt there will be 6 prints.
So Cost per print      =$ 50/(5/6*500)	0.12 per tshirt
Out of this 5 print is for manufacturing expense and 1 print is for non manufacturing expenses
Hence =5/6*.12 is for manufacturing and rest for variable
© Laser paper cost	= 20/(200*5)
(d) labour	= 8hrs* 3 employee
	= 24 per hour/10 tshirt per hour
	2.4
Calculation of total fixed cost per month
Particulars	Manufacturing	Selling	Total	Total p.a
Rent p.m	$       2,250.00	$    250.00	$ 2,500.00	$ 30,000.00
Contract fees	$          833.33		$    833.33	$ 10,000.00
Depreciation p.m	$          150.00	$      16.67	$    166.67	$   2,000.00
Heat press machine depreciation	$          125.00		$    125.00	$   1,500.00
Selling & administrartive work		$ 1,000.00	$ 1,000.00	$ 12,000.00
Insurance	$          300.00		$    300.00	$   3,600.00
Total	$       3,658.33	$ 1,266.67	$ 4,925.00	$ 59,100.00
Calculation of Contribution Margin
Particulars	Amount (in $)
Revenue	15
Less: variable costs	6.69
Contribution margin per unit	8.31
Calculation of Break even point	= Total Fixed Cost/Contribution Margin p.u
	8834.080717
	=8834 units