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ACCT 551 FINAL CASE STUDY SPRING 2016 Due: May 9, 2016

ACCT 551 FINAL CASE STUDYSPRING 2016Due: May 9, 2016Total Points Available = 150The purpose of this case study is to help you integrate the managerial accounting concepts thatwere covered in class and apply them to a real-world business setting.Business DescriptionYou will assume the role of an entrepreneur to start a small company. Your company willrent a retail cart inside the Mall of America to imprint T-shirts with exclusive original designs bya famous artist who is a friend of yours. Your friend has agreed to design these T-shirt picturesfor you each year at a special discount. Your target customers are teenagers and young adultswho have your kind of good taste. Your business is scheduled to launch on January 1, 2017.Cost information:1Mall of America charges you $2,500 rent per month, which includes utilities,cleaning, and maintenance.2You 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).3To store T-shirts that were bought, but not yet imprinted, you will rent a storage unit.The storage unit costs $75 per month.4You agreed to pay your artist friend a $3,000 annual contract fee for twelve T-shirtdesigns. This same term is renewable for the next 3 years. Each T-shirt picture willonly be used for one year. Therefore, in the second year, 12 new pictures will bedesigned for another $3,000 annual contract fee.5You will buy several items before the start of your business:a. Computer and printer – cost $5,000. They are expected to last 3 years withoutsalvage value. Straight-line method of depreciation should be used.b. Heat press machine – cost $2,500. The machine is used for imprinting T-shirtsonly and is expected to last 3 years without salvage value.c. Transfer paper – Each case of transfer paper costs $400 and contains 1,000 sheetsof 8.5 x 11 transfer paper. One transfer paper is used to print one T-shirt.d. Ink-jet cartridges – On average, each cartridge costs $50 and can make 500 prints.Each T-shirt requires one print.6Each T-shirt costs about $0.20 to wrap and box.7Students are hired as part-time workers. On average it takes one labor hour to print10 shirts. Folding and packaging 20 shirts takes about one labor hour. Each workeris paid $10 per hour.8A liability insurance policy is purchased at a cost of $3,600 per year to protect thebusiness from legal obligations.Requirements:1Name your company (5 points)2What and how much are the variable costs? Present each item in cost per T-shirt basis(5 points).3What and how much are the fixed costs? Present each item in total cost per year (5points).4Write out the annual cost formula in Y = a + bX format (5 points).5Assume that you make and sell 12,000 T-shirts in the first year. Use the cost formulato calculate the first year’s total cost. If the T-shirts sell at $15 each, how much wouldnet profit be in the first year? (10 points)6Based on the estimated sales level of 12,000 T-shirts for the first year, prepare thecompany’s forecasted income statement for the year ended on 12/31/2017 (10 points).7Calculate contribution margin per T-shirt and contribution margin ratio (5 points).8Calculate how many T-shirts need to be sold in order to break-even. Calculate howmuch sales in dollars are needed to make in order to break-even (10 points).9Prepare a cost/volume/profit chart (10 points).10Calculate how many T-shirts need to be sold in order to make a $25,000 target profitfor the year (5 points).11Based on the assumption that 12,000 T-shirts will be made and sold during the firstyear of business, calculate the margin of safety and the operating leverage for thebusiness. What do these figures tell you about how risky the business is? (10 points)12If sales could increase by 1,200 shirts (i.e. a 10% increase), by how much in dollarswould net operating income increase? By what percentage would net operatingincome increase? (5 points)13Prepare a contribution format income statement assuming a sales increase by 10% to13,200 shirts. Compare your new net operating income with your answer in 6 (10points).14Calculate the total amount of cash that will be needed prior to the launching day ofthe business in order to buy all necessary equipment and machines, purchase allmaterials and supplies needed for the first three months of operations, and to pay theemployees’ first three months wages. This amount will be your initial investment inthe business. Following is information regarding the cash needs for variable andfixed costs:a. Variable costs and expensesi. For every variable cost item, sufficient quantity will be purchased to makethe first 1,000 T-shirts. Sufficient cash will also be required to pay thelabor costs for making, folding, and wrapping the first 1,000 T-shirts.b. Fixed costs and expensesi. The initial amount of cash should be sufficient to pay for the first quarter’scash needs for fixed costs.1. Rent, storage unit costs, and liability insurance will be paidmonthly2. The payment to the artist, computer and printer, and heat pressmachine will be paid on January 1, 2017.(10 points)1516.17.18.Prepare a cash budget for the company’s first year of operations. Assume that theselling price is $15 per shirt and that 12,000 T-shirts will be made and sold in thefirst year. Assume all sales are cash sales and that all costs and expenses are paidin cash. The initial cash balance is the amount calculated in #14. You decide tomaintain a minimum cash balance of $10,000 at December 31, 2017 (15 points).Calculate the first year’s estimated return on equity (note that beginning equitywill equal the initial investment in the business calculated in #14). (5 points).After reviewing the budgeted income statement and the estimated return on equityfor the first year of operations, you are disappointed at the estimated net incomeand the low rate of return. Consider business strategies that will help to improveprofitability.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 sellingprice 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, drawthe T-shirt pictures yourself, move business location to a less expensive location,or some other strategy. Describe your strategy clearly and justify why you believethe strategy will work.b.Provide the variable cost per T-shirt, total fixed cost, selling price per Tshirt, and contribution margin per T-shirt under your new strategy. Provide thenew cost formula. What is the new break even?c.Under your revised strategy, how many T-shirts may be sold under the bestcase scenario and the worst case scenario? Calculate the net income under thebest case scenario and the worst case scenario (15 points).After your thorough analyses of costs, sales, and profitability of your T-shirtbusiness throughout the project, what is your overall impression of the futurepotential of the business? Provide a short assessment (10 points).

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