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.

After reviewing the budgeted income statement and the estimated return on equity for the first year of operations, you are disappointed at the estimated net income and the low rate of return. Consider business strategies that will help to improve profitability.

a.         Develop a business strategy which will involve at least three changes. Changes may be made in variable cost per t-shirt, total fixed costs, and/or selling price per T-shirt. For example, you could propose to use better quality T-shirts, sell the T-shirts at a higher or lower price, increase the advertising budget, draw the T-shirt pictures yourself, move business location to a less expensive location, or some other strategy. Describe your strategy clearly and justify why you believe the strategy will work.

b.         Provide the variable cost per T-shirt, total fixed cost, selling price per T-shirt, and contribution margin per T-shirt under your new strategy. Provide the new cost formula. What is the new break even?

c.         Under your revised strategy, how many T-shirts may be sold under the best case scenario and the worst case scenario? Calculate the net income under the best case scenario and the worst case scenario (15 points).

Explanation / Answer

Answer

(a)

You should shift rented retail shop from Mall of America to high commercial area surrounded by colleges, universities & hostels with some large space which will save rent of $ 1000 per month and storage unit costs of $75 per month.

You should pay your artist friend in fixed as well as variable terms. You should pay your artist friend $ 1000 fixed annual contract fee and remaining as % of selling price per T-shirt on number of T shirts sold with his designed pictures.

You should also sell customized designed T shirts as per customer needs designing work of which should be outsourced on per T shirt basis. Final customized T shirts must be sold as premium product.

One time advertisement fair must be conducted every year at all universities and colleges to market t shirts.

All of above cumulatively would result in saving in overall costs and increase in revenues which will improve profitability.

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