Business Simulation Project (110 points)

The purpose of this project is to help you integrate the managerial accounting concepts we cover in class and apply them to a real-world business setting.  This project contains four parts.  In the first part, you will analyze the costs of your business. In the second part, you will conduct cost-volume-profit analysis and prepare budgeted income statements.  In the third part, you will prepare budgets for your own business and in the final part, you will come up with strategies to improve the profitability of your business.

Part One (20 points): You are an entrepreneur who will be starting a t-shirt business.  Your company will rent space inside the mall.  You will buy plain t-shirts and imprint them with one of twelve pictures exclusively designed for your company by a famous artist who is a friend of yours.  Your target customers are teenagers and young adults and you plan on selling your t-shirts for $15 each.  Your business is scheduled to open on June 1, 2022.  Below is the cost information for your company:

  1. The mall charges you $2,500 rent per month which includes utilities, telephone, cleaning, and maintenance.  You estimated that 90% of the rent is related to operations and 10% is related to selling and administrative activities. 
  2. You will purchase white, cotton t-shirts from a wholesaler for $3.75/shirt.
  3. You agree to pay your artist friend a $10,000 annual contract fee for designing 12 new t-shirts each year for your business.
  4. You will buy a computer and printer that cost $6,000 which is expected to last 3 years with no salvage value.  You will use straight-line depreciation method.  You estimate 90% of the computer and printer will be used for operations and 10% will be used for selling and administrative activities. 
  5. You purchase a heat press machine for $4,500 which is expected to last 3 years with no salvage value.  The machine is used only for imprinting the t-shirts. 
  6. You will purchase transfer paper that cost $400/case and contains 1,000 sheets of transfer paper.  One sheet of transfer paper will be used to print one t-shirt.
  7. You will purchase ink-jet cartridges that cost $50 and can make 500 prints.  Each t-shirt requires one print.  You will also need to print flyers for selling and administrative purposes.  For this non-manufacturing printing, you will print about flyer for every 5 t-shirts sold.
  8. You will purchase laser paper to make the flyers for $20/ream which contains 200 sheets of paper.
  9. You will hire three part-time employees.  You will pay each employee $8/hour. On average printing 10 t-shirts will take one hour of labor.
  10. You will do all of the selling and administrative work by yourself and will be paid $12,000/year.
  11. To protect your business from legal obligations, you will purchase a liability insurance that cost $3,600/year.

Part One Requirements:

  1. Come up with an attractive name for your business.
  2. Determine which and how much of your costs are variable costs. List the manufacturing and non-manufacturing cost items and present each of them in cost per T-shirt basis.
  3. Determine which and how much of the costs are fixed costs.  List the manufacturing and non-manufacturing costs items and present each of them in total cost per month.
  4. Write out your monthly cost formula in following format: total monthly costs = fixed costs + (variable costs x units produced).  Assume that you make and sell 650 t-shirts in the first month.  Using your cost formula, calculate your first month’s total cost.  If you sell these t-shirts at $15 each, determine how much would net profit be in the first month.

**Use the template found on Moodle to enter your answers and submit the completed template in Moodle for grading.  You must show your calculations under explanations to get full credit!!

Part Two (25 points): Now you have developed your costs estimates, do some evaluations on your proposed business.  Be sure to use the answer key from part one of the project for your calculations in this part of the project.

  1. Based on an estimated sales level of 7,800 t-shirts for the first year, prepare your company’s forecasted income statement for year ended May 31, 2023 using both (1) the traditional format based on absorption costing and (2) the contribution format based on variable costing. You must fill in the missing labels on the income statements for full credit.  Also, be sure to show your calculations under explanations to get full credit!! (See chapter 21 for help)
  2. Calculate the product cost per unit under both (1) absorption costing and (2) variable costing.
  3. Perform cost-volume-profit analysis (see chapter 20 for help) on your new business by determining the following:
    1. Contribution margin per T-shirt
    1. Contribution margin ratio
    1. Number of T-shirts you need to sell in order to break-even EACH month
    1. Amount of sales in dollars you need to make in order to break-even EACH month
    1. Number of T-shirts you need to sell in order to make $1,000 target profit EACH month
    1. Margin of safety
    1. Operating leverage

**Use the template found on Moodle to enter your answers and submit the completed template in Moodle for grading.  You must show your calculations under explanations to get full credit!!

Part Three (30 points): Now that you have analyzed your proposed new business, it’s time to do some budgeting.

  1. Calculate the total amount of cash you will need to have before opening your business, in order to buy all necessary equipment and machines, to purchase all materials and supplies needed for the first three months of operations, and to pay your employees’ first three months wages.  Assume that your parents have agreed to loan you this amount and only charge you 5% interest each year.  The following information regarding cash payment needs for your variable and fixed costs are below:
    1. Variable costs: For every variable cost item, you decide to buy sufficient quantity for making the first 2,000 t-shirts.  You also want to have the adequate amount of cash on hand to pay the labor costs needed for making the first 2,000 t-shirts.  Assume you can pay your workers for a fraction of an hour but you cannot purchase a fraction of an ink-jet cartridge or a partial case/ream of paper.
    1. Fixed costs: Your initial amount of cash should be sufficient to pay for the first quarter’s cash needs for your fixed costs.  For your fixed cost items, payments will be made according to below:
      1. Rent to the mall will be paid monthly
      1. FULL payment to the artist, FULL payment for the computer and printer, and FULL payment for heat press machine will need to be made before you open for business.
      1. You will NOT pay yourself until the end of the first year of operations.
  2. Prepare a cash budget for your company for the FIRST YEAR of operations.  Assume that the selling price is $15/t-shirt and that 7,800 t-shirts will be made and sold in the first year.  Assume all sales are cash sales and that all costs are paid in cash.  Your cash balance on June 1 is the amount you are borrowing from your parents (amount calculated in step 1 above).  Remember when calculating your manufacturing and selling & administrative expenses, that monthly depreciation on your equipment (i.e. computer & printer and heating press) is NOT a cash payment.   You will use the excess cash on hand at the end of the year to pay back the loan from your parents INCLUDING the interest that is owed.
  3. You decide that at the end of the first year, you would like to have some extra t-shirts on hand for the start of the second year of operations.  You would like to have 500 extra shirts; beside the 7800 shirts you are already planning to make during the first year.  Prepare a direct materials budget to determine how much in materials you will need to purchase to ensure that you have extra shirts on hand at the end of the year.    

**Use the template found on Moodle to enter your answers and submit the completed template in Moodle for grading.  You must show your calculations under explanations to get full credit!!

Part Four (35 pts.): After reviewing the budgets, you prepared for your company’s first year of operations, you are disappointed at the estimated net income.  So, you begin to think about business strategies that you hope will help to improve the profitability of your t-shirt business. 

Develop a business strategy which will involve at least three changes in some (or all) of the following attributes: (1) variable cost per t-shirt, (2) total fixed cost, and (3) selling price per t-shirt.  Your three (or more) changes can come in any combination of (1), (2), and (3).  For instance, you could propose that you use better quality t-shirts as raw material (which will increase the variable cost per t-shirt and increase the advertising budget), and then sell the t-shirts at a higher price (which will change the selling price per t-shirt). By doing so you are hoping to sell more t-shirts and increase your revenue and hopefully your net income. Use your imagination to come up with creative business strategy. 

In a minimum two-page typed document, describe your strategy clearly and justify why you believe your strategy will work.  Incorporate small/simple tables in your document that answer the three bullet points listed below. (Chapter 24 in the textbook might give you some ideas on business strategies and how to compare the different options in a simple table.)

  • Indicate by how much your variable cost per t-shirt, total fixed cost, and selling price will change under your business strategy.
    • What would the new contribution margin per t-shirt be? What would be the new break-even level in number of t-shirts be under your new strategy?
    • Under your strategy, how many t-shirts do you think you will be able to produce/sell in a year in the best (but realistic) scenario?  How many t-shirts do you think you will produce/sell in the worst scenario? Assume that the t-shirts produced will be all sold.  Calculate your net income under each of the two scenarios. 

After your thorough analysis of costs, sales, and profitability of your t-shirt business, what is your overall impression of the future potential of this business venture?  Submit your business strategy document in Moodle by the due date for grading. (There is no template for this part of the project; complete it using Microsoft Word.)

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