GottaRun is a local company that custom-prints tech running shirts for organized racing events. The company has been in business for 2 years. Normal demand for the tech running shirts is approximately 600 shirts per event. On average, there are two events per month. The company has the following direct costs per shirt:
Direct material (tech shirts).......... $ 5.00
Direct labor (printing) ............ $ 1.00
Direct labor (design) ............ $ 2.50
Total direct costs ............ $ 8.50
The company has historically estimated selling price based on the direct cost of providing the tech shirts. Prices reflected a 40% desired profit margin above direct costs. Recently, GottaRun has experienced lower- than- normal profits and suspects that the prices it is charging are not covering all costs (direct and indirect) of providing the tech shirts. Indirect costs of the company include depreciation on the printing machines and utilities. The following data from the most recent year relate to these indirect costs:

The management accountant estimates the following regression equation with utilities as the dependent variable and the number of tech shirts as the independent variable:
y = $ 689 + $ 1.65X

1. If monthly sales are 1,200 tech shirts, what is the full cost per tech shirt?
2. Why has GottaRun been experiencing lower- than- normal profits?
3. What price must GottaRun charge to recover all costs and earn a 25% margin on all sales?
4. What implications will a potential price increase have on GottaRun and/ or its customers? How might the owners address any negative reactions fromcustomers?

  • CreatedJanuary 15, 2015
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