For Instructor Use Only Case
Yes, it is important for Michael to stipulate certain criteria during
planning for his new business. Michael is wise to set criteria other than
simply making a profit. First, Michael wants to do something he enjoys.
Because he has prior experience in a related industry and he has envi-
sioned having his own business he will be better prepared to handle
the responsibilities of this new business. Michael’s positive attitude will
be reflected in the way he handles employees and customers. Michael’s
business will probably come from customers such as university groups,
church groups, civic organizations, youth athletic clubs, and secondary
school groups. Because Michael is offering quality shirts at a modest
price, he will, in effect, be contributing to the community. In addition,
as Michael’s company becomes more profitable he will give back to the
community through cash donations to some of these groups. Michael’s
foresight (wanting to grow and be more successful every year) will
encourage him to make decisions that will profit the business not just
in the short run, but also in the long run.
The difference in the high and low levels of activity is 6,000 units (8,000
units in September less 2,000 units in January). The difference in utility
costs is $300 ($1,400 – $1,100). Therefore, estimated variable cost per
unit is $.05 and total fixed costs are $1,000 computed as follows:
$300 ÷ 6,000 = $.05
$1,400 – ($.05 X 8,000) = $1,000
The difference in maintenance costs is $198 ($1,914 – $1,716).
Therefore, estimated variable cost per unit is $.033 and total fixed costs
are $1,650 computed as follows:
$198 ÷ 6,000 = $.033
$1,914 – ($.033 X 8,000) = $1,650
If Michael has sales of $12,000, the units sold total 750 ($12,000 ÷ $16).
Therefore his total variable costs relating to utilities and maintenance
for 750 shirts total $62.25 computed as follows:
750 shirts X $.05 = $37.50
750 shirts X $.033 = $24.75
If Michael has sales of $12,000, the total fixed costs would be $2,650
($1,000 + $1,650).