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1. Introduction Joe Haddad and Nick Dadas founded University Tees (www.universitvtees.com) in 2007 to sell customized t-shirts, embroidered apparel, and other promotional items. While Joe and Nick sensed that there would be a niche for their business in the college town of Oxford, Ohio (home to Miami Univer- sity), they understood that success would not come easy given the daunting reality of small business failure rates. The success of their venture hinged in large part on being able to calculate intelligent bid prices for new business opportunities. If bid prices were too low, then the company would secure many customer orders, but it would not generate any profit. If bid prices were too high, then the com- pany would not secure enough customer orders, let alone earn sufficient profits. The question Joe and Nick wrestled with was obvious: How do we develop a pricing strategy that will enable us to grow our customer base and our profits at the same time? As a starting point, Joe and Nick decided to focus their attention on pricing their company s most important product line, t-shirts. 2. Customer analysis University Tees serves college students and the organizations and activities that they participate in, such as intramural sports teams, sororities and fraternities, theatre and band groups, and professional societies. These student groups have a large amount of bargaining power with t-shirt suppliers for two reasons. First, the quality of screen-printed t-shirts is largely the same regardless of who supplies them. Second, numerous price quotes can be easily obtained through phone calls or internet-based inquiries and then readily compared to one another. While switching costs tend to be minimal, stu- dent groups often remain loyal to a supplier who makes a favorable impression while handling their first order, primarily because setting up accounts and payment plans through university-held funds can be complicated and time-consuming. University Tees customers typically use four factors in choosing a t-shirt supplier. First, college stu- dents and student organizations often have a limited amount of money, so cost is a critical factor. Sec- ond, college students tend to be short on time, and they fulfill their extra-curricular commitments in the evening hours and on weekends. This requires that suppliers provide hassle-free service and con- venient business hours. Third, students busy schedules suggest that they need suppliers that can de- liver products on short notice. Fourth, customers prefer t-shirts with visually appealing art work that is customized to their creative vision. While students often have interesting ideas about how to design their t-shirts, they do not have the artistic skills to translate those ideas into a drawing that can be used for silk screening purposes. 3. Competitor analysis University Tees faces two types of competitors. First, numerous internet companies sell customized t-shirts and ship them directly to the customer s door. These companies are geographically dispersed across the United States and usually have standard business hours (via telephone access) specific to the time zone where they are located. Internet suppliers rely primarily on clip-art to create t-shirt de- signs, or they require customers to submit artwork. The standard delivery time for an internet com- pany is 10-14 days from the date when the artwork is completed and the customer places the order. University Tees second key competitor is College Custom Apparel (CCA), a bricks-and-mortar busi- ness in the city of Oxford. CCA maintains normal weekday business hours at its production facility and retail sales office located about one half mile from the Miami University campus. CCA works with cus- tomers to create customized artwork. The company purchases the appropriate quantity of t-shirts from its suppliers and then uses its own production facility to create and add the desired screen- For example, if University Tees received an order for 70 t-shirts that had one art design on the front requiring two colors and another art design on the back requiring two colors, the total variable cost of the order expressed on a per t-shirt basis would be computed as follows: T-shirts ($3 per shirt) Sales commission ($0.50 per shirt) Shipping ($0.60 per shirt) Artwork design ($20 per design) Printing ($0.40 per side, per color, per shirt, or in this case $1.60 per shirt) Screens ($15 per screen) Total variable costs (a) Number of t-shirts (b) Variable costs per t-shirt (a) (b) $210.00 $35.00 $42.00 $40.00 $112.00 $60.00 $499.00 70 $7.13 5. Bidding on customer orders Joe and Nick believed that with the right pricing strategy they could sell between 5000 and 15,000 t-shirts in the coming year. Their suppliers could easily provide 15,000 t-shirts if the best-case sce- nario materialized; however, Joe and Nick realized that expecting to sell more than 15,000 t-shirts in the coming year was overly optimistic given that their start-up company was beginning operations with no brand recognition on the Miami University campus. As Joe and Nick reviewed three current bid opportunities and their average order profile, they wondered what price per t-shirt to choose for each of these four scenarios. Number of t-shirts Front of the shirt Number of art designs Number of colors Back of the shirt Number of art designs Number of colors Questions Order 1 30 1 1 1 2 Order 2 60 1 2 0 0 Order 3 300 1 2 1 2 Average order 50 1 1 1 1 1. How would you describe University Tees strategy? What risks does University Tees face that may threaten the attainment of its strategic objectives? 2. What key factors influence the prices that companies establish for their products and services? 3. Define the cost driver for each of University Tees variable costs. Without calculating any numbers, would you expect the total variable cost expressed on a per t-shirt basis for high volume orders to be higher or lower than the total variable costs expressed on a per t-shirt basis for low volume orders? Explain your answer. 4. What is the total variable cost expressed on a per t-shirt basis for each of the four order scenarios in the case? 5. What bid price per t-shirt would you establish for each of the four order scenarios in the case (round your answer to the nearest dollar)? Would your answer differ depending on whether each order was placed by a repeat customer or a new customer? Why or why not? 6. Are University Tees fixed costs relevant to its pricing decisions? Why or why not? 7. Assuming that all of University Tees sales conform to its average order profile, use your recom- mended selling price to determine the number of t-shirts that must be sold to break even. Also, pre- pare a contribution format income statement that shows University Tees net operating income if it 8. Assume that all of University Tees sales conform to its average order profile. Prepare two contri- bution format income statements: (a) assume 12,000 units are sold at a price of $9 per t-shirt and (b) assume 8000 units are sold at a price of $10 per t-shirt. What insights about the relation- ship between price, quantity sold, and profits are revealed by these income statements? 6. Implementation guidance The University Tees case is intended for sophomore-level managerial accounting classes. The case strikes an appropriate balance between offering a realistic business context that will engage students and providing the simplicity that is necessary for an introductory course. This balance is an important contribution of this case, given that a majority of cases are written for an MBA audience and possess too much complexity for sophomores. Students will need prerequisite knowledge in six areas to successfully analyze the case. First, they will need an elementary introduction to the concepts of strategy and business risks. Second, they will need to understand the difference between variable and fixed costs. Third, they will need to under- stand how to compute a breakeven point. Fourth, they will need to understand how to prepare con- tribution format income statements. Fifth, they will need a basic understanding of the meaning of relevant costs. Sixth, the case will generate a more engaging discussion if students have been intro- duced to some fundamental pricing concepts, such as cost-plus pricing and market-based pricing. As a reference point, these topics are covered in chapters 1, 2, 6, 13, and Appendix A of Managerial Accounting, 12th edition, by Garrison, Noreen, and Brewer. 1. Introduction Joe Haddad and Nick Dadas founded University Tees (www.universitvtees.com) in 2007 to sell customized t-shirts, embroidered apparel, and other promotional items. While Joe and Nick sensed that there would be a niche for their business in the college town of Oxford, Ohio (home to Miami Univer- sity), they understood that success would not come easy given the daunting reality of small business failure rates. The success of their venture hinged in large part on being able to calculate intelligent bid prices for new business opportunities. If bid prices were too low, then the company would secure many customer orders, but it would not generate any profit. If bid prices were too high, then the com- pany would not secure enough customer orders, let alone earn sufficient profits. The question Joe and Nick wrestled with was obvious: How do we develop a pricing strategy that will enable us to grow our customer base and our profits at the same time? As a starting point, Joe and Nick decided to focus their attention on pricing their company s most important product line, t-shirts. 2. Customer analysis University Tees serves college students and the organizations and activities that they participate in, such as intramural sports teams, sororities and fraternities, theatre and band groups, and professional societies. These student groups have a large amount of bargaining power with t-shirt suppliers for two reasons. First, the quality of screen-printed t-shirts is largely the same regardless of who supplies them. Second, numerous price quotes can be easily obtained through phone calls or internet-based inquiries and then readily compared to one another. While switching costs tend to be minimal, stu- dent groups often remain loyal to a supplier who makes a favorable impression while handling their first order, primarily because setting up accounts and payment plans through university-held funds can be complicated and time-consuming. University Tees customers typically use four factors in choosing a t-shirt supplier. First, college stu- dents and student organizations often have a limited amount of money, so cost is a critical factor. Sec- ond, college students tend to be short on time, and they fulfill their extra-curricular commitments in the evening hours and on weekends. This requires that suppliers provide hassle-free service and con- venient business hours. Third, students busy schedules suggest that they need suppliers that can de- liver products on short notice. Fourth, customers prefer t-shirts with visually appealing art work that is customized to their creative vision. While students often have interesting ideas about how to design their t-shirts, they do not have the artistic skills to translate those ideas into a drawing that can be used for silk screening purposes. 3. Competitor analysis University Tees faces two types of competitors. First, numerous internet companies sell customized t-shirts and ship them directly to the customer s door. These companies are geographically dispersed across the United States and usually have standard business hours (via telephone access) specific to the time zone where they are located. Internet suppliers rely primarily on clip-art to create t-shirt de- signs, or they require customers to submit artwork. The standard delivery time for an internet com- pany is 10-14 days from the date when the artwork is completed and the customer places the order. University Tees second key competitor is College Custom Apparel (CCA), a bricks-and-mortar busi- ness in the city of Oxford. CCA maintains normal weekday business hours at its production facility and retail sales office located about one half mile from the Miami University campus. CCA works with cus- tomers to create customized artwork. The company purchases the appropriate quantity of t-shirts from its suppliers and then uses its own production facility to create and add the desired screen- For example, if University Tees received an order for 70 t-shirts that had one art design on the front requiring two colors and another art design on the back requiring two colors, the total variable cost of the order expressed on a per t-shirt basis would be computed as follows: T-shirts ($3 per shirt) Sales commission ($0.50 per shirt) Shipping ($0.60 per shirt) Artwork design ($20 per design) Printing ($0.40 per side, per color, per shirt, or in this case $1.60 per shirt) Screens ($15 per screen) Total variable costs (a) Number of t-shirts (b) Variable costs per t-shirt (a) (b) $210.00 $35.00 $42.00 $40.00 $112.00 $60.00 $499.00 70 $7.13 5. Bidding on customer orders Joe and Nick believed that with the right pricing strategy they could sell between 5000 and 15,000 t-shirts in the coming year. Their suppliers could easily provide 15,000 t-shirts if the best-case sce- nario materialized; however, Joe and Nick realized that expecting to sell more than 15,000 t-shirts in the coming year was overly optimistic given that their start-up company was beginning operations with no brand recognition on the Miami University campus. As Joe and Nick reviewed three current bid opportunities and their average order profile, they wondered what price per t-shirt to choose for each of these four scenarios. Number of t-shirts Front of the shirt Number of art designs Number of colors Back of the shirt Number of art designs Number of colors Questions Order 1 30 1 1 1 2 Order 2 60 1 2 0 0 Order 3 300 1 2 1 2 Average order 50 1 1 1 1 1. How would you describe University Tees strategy? What risks does University Tees face that may threaten the attainment of its strategic objectives? 2. What key factors influence the prices that companies establish for their products and services? 3. Define the cost driver for each of University Tees variable costs. Without calculating any numbers, would you expect the total variable cost expressed on a per t-shirt basis for high volume orders to be higher or lower than the total variable costs expressed on a per t-shirt basis for low volume orders? Explain your answer. 4. What is the total variable cost expressed on a per t-shirt basis for each of the four order scenarios in the case? 5. What bid price per t-shirt would you establish for each of the four order scenarios in the case (round your answer to the nearest dollar)? Would your answer differ depending on whether each order was placed by a repeat customer or a new customer? Why or why not? 6. Are University Tees fixed costs relevant to its pricing decisions? Why or why not? 7. Assuming that all of University Tees sales conform to its average order profile, use your recom- mended selling price to determine the number of t-shirts that must be sold to break even. Also, pre- pare a contribution format income statement that shows University Tees net operating income if it 8. Assume that all of University Tees sales conform to its average order profile. Prepare two contri- bution format income statements: (a) assume 12,000 units are sold at a price of $9 per t-shirt and (b) assume 8000 units are sold at a price of $10 per t-shirt. What insights about the relation- ship between price, quantity sold, and profits are revealed by these income statements? 6. Implementation guidance The University Tees case is intended for sophomore-level managerial accounting classes. The case strikes an appropriate balance between offering a realistic business context that will engage students and providing the simplicity that is necessary for an introductory course. This balance is an important contribution of this case, given that a majority of cases are written for an MBA audience and possess too much complexity for sophomores. Students will need prerequisite knowledge in six areas to successfully analyze the case. First, they will need an elementary introduction to the concepts of strategy and business risks. Second, they will need to understand the difference between variable and fixed costs. Third, they will need to under- stand how to compute a breakeven point. Fourth, they will need to understand how to prepare con- tribution format income statements. Fifth, they will need a basic understanding of the meaning of relevant costs. Sixth, the case will generate a more engaging discussion if students have been intro- duced to some fundamental pricing concepts, such as cost-plus pricing and market-based pricing. As a reference point, these topics are covered in chapters 1, 2, 6, 13, and Appendix A of Managerial Accounting, 12th edition, by Garrison, Noreen, and Brewer.

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SWOT strengths weaknesses opportunities and threats analysis is a framework used to evaluate a companys competitive and to develop strategic planning SWOT analysis assesses internal and external facto... View the full answer