Your project group will assume the role of young entrepreneurs to start a small company. Your company will rent a retail cart inside the Stonebridge Mall to buy plain T-shirts and imprint them with one of the twelve beautiful pictures exclusively designed for your company by a famous artist who is a friend of yours. He has agreed to design twelve super attractive 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, 2014.

Cost information:

(1) Stonebridge charges you $2,500 rent per month, which includes utilities, telephone, cleaning, and maintenance. You estimated that 90% of the rent was related to factory operations and 10% was related to selling and administrative activities.

(2) You will order white, cotton t-shirts from a T-shirt wholesaler. Each T-shirt will cost (including taxes, shipping, and handling) $3.75 to purchase.

(3) To store T-shirts that were bought, but not yet imprinted, you will rent a storage unit. The storage unit costs you $125 per month.

(4) You agreed to pay your artist friend a $10,000 annual contract fee plus a $300 design fee for each of the 12 T-shirt pictures designed. 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 at $300 each and another $10,000 annual contract fee will be charged.(5) You will buy several items before that start of your business:

a. A computer and a printer: You will pay $6,000 (including taxes, shipping and handling) to buy a computer and a printer. You expect both to last about 3 years without salvage value. You will use the straight-line method for depreciation. You estimate that about 90% of the computer and printer will be used for factory operations and 10% will be for selling and administrative activities.

b. A heat press machine: You will pay $4,500 (including taxes, shipping and handling) for a heat press machine. The machine is used for imprinting t-shirts only and is expected to last 3 years without salvage value.

c. Transfer paper: Each case of transfer paper costs $400 and contains 1,000 sheets of 8.5×11 transfer paper. You expect to use one transfer paper 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. You also need to print flyers, etc. for selling and administrative purposes. For this non-manufacturing printing, you will print about one page for every 5 T-shirts sold.

e. Laser paper: You will buy several reams of laser paper to print promotion flyers, etc. Each ream costs $20 and contains 200 sheets of 8.5×11 laser paper.(6) Wrapping paper and box: Each T-shirt costs about $0.20 to wrap and box. Wrapping and boxing are not considered as manufacturing.

(7) You will hire three fellow students as part-time workers. They not only help you operate the machine, but also help fold, wrap and box T-shirts. Sometimes, three of them work at the same time. But, sometimes they don't because of their different class schedules. On average, printing 10 shirts will take one labor hour. Folding and packaging 20 shirts also will take about one labor hour. You will pay each of your workers $8 per hour. Folding and wrapping are not considered as manufacturing.

(8) You (the owners) do all the selling and administrative work by yourselves. You will pay yourselves a total of $12,000 per year (to be divided among all owners).(9) To protect your business from legal obligation, you will purchase a liability insurance that will cost you $3,600 per year.

(10) You will hold four end-of-quarter parties to promote sales of your t-shirts. Each party costs you about $1,000.

Requirements

(1) What and how much of your costs are variable costs? List your product and period variable cost items and present each of them in cost per T-shirt basis.

(2) What and how much of your costs are fixed costs? List your product and period fixed cost items and present each of them in total cost per year.

(3) Write out your yearly cost formula in Y = a + bX format. Be sure to include both manufacturing costs and non-manufacturing costs in the cost formula.

(4) Assume that you make and sell 7,800 t-shirts in the first year. Use your cost formula to calculate your first year's total cost. If you sell these t-shirts at $15 each, how much would net profit be in the first year?