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1、University Tees: Introducing fundamentals of management accounting in a small businessPeter C. Brewer a,*, Michael A. Garamoni b, Joseph Haddadca Department of Accountancy, Miami University, Oxford, OH 45056, United States b Miami University, Oxford, OH 45056, United States c University Tees, Inc.,
2、26865 Center Ridge Road, Westlake, OH 44145, United States article info AbstractKeywords: This case introduces sophomore-level managerialManagerial accounting accounting students to pricing decisions. The caseCost drivers also offers an opportunity to discuss the conceptsRelevant costs of business s
3、trategy, business risk, and cost driversBreakeven analysis Students draw on concepts such as relevant costing,Contribution margin break-even analysis, and contribution format incomePricing decisions statements to recommend price quotes for a small business.12008 Elsevier Ltd. All rights reserved.1.
4、IntroductionJoe Haddad and Nick Dadas founded University Tees () 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 University), they unders
5、tood 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 custome
6、r orders, but it would not generate any profit. If bid prices were too high, then the company 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
7、 base and our profits at the same time?” As a starting point, Joe and Nick decided to focus their attention on pricing their companys most important product line, t-shirts. 2. Customer analysisUniversity Tees serves college students and the organizations and activities that they participate in, such
8、 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 supp
9、lies 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, student groups often remain loyal to a supplier who makes a favorable impression while handling their fi
10、rst 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 students and student organizations often have a limited amount o
11、f money, so cost is a critical factor. Second, 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 convenient business hours. Third, students busy schedules s
12、uggest that they need suppliers that can deliver 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 ski
13、lls to translate those ideas into a drawing that can be used for silk screening purposes. 3. Competitor analysisUniversity Tees faces two types of competitors. First, numerous internet companies sell customized t-shirts and ship them directly to the customers door. These companies are geographically
14、 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 designs, or they require customers to submit artwork. The standard delivery time for a
15、n internet company is 1014 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 business in the city of Oxford. CCA maintains normal weekday business hours at its production faci
16、lity and retail sales office located about one half mile from the Miami University campus. CCA works with customers 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 scre
17、en-printed patterns to the t-shirts. CCA notifies customers by telephone when their order is complete, and the customers return to the store to pick up their finished goods. The table below summarizes the prices charged by University Tees competitors for various quantities of t-shirts with a one-col
18、or design on the front and another one-color design on the back to be delivered in the standard time frame of 1014 days: Quantity CCA Average internet competitor 25 shirts $12 per shirt $13 per shirt 50 shirts $10 per shirt $11 per shirt 100 shirts $8 per shirt $10 per shirt 200 shirts $7 per shirt
19、$9 per shirt 4. University Tees strategy and cost structure University Tees strategy is to differentiate itself from competitors in four ways. First, University Tees reduces its fixed overhead costs by outsourcing t-shirt production. Given that t-shirt quality is largely the same regardless of who p
20、roduces the garment, University Tees decided not to spend money creating manufacturing capacity that mirrors the capabilities of its competitors. Instead, the company focuses its resources on marketing and on-campus customer relationship management. Second, University Tees uses students as commissio
21、ned-based sales representatives, available to customers via cell phone seven days a week, day or night. Third, the company employs an artist who meets with customers at a location of their choice to create artwork that exactly corresponds to their preferences. Fourth, the company provides customers
22、with an average order-to-delivery cycle time of 710 days. Since University Tees uses United Parcel Service (UPS) for product delivery, customers can place and receive orders without ever having to leave their residence. Since University Tees does not have any bricks-and-mortar facilities to maintain
23、, it has very low fixed costs as follows: Combined salaries of two partners $20,000 per year Overhead costs (e.g., website, phone, fax) $5000 per year Marketing costs (e.g., newspaper ads, fliers, pens) $2000 per year The variable costs incurred by University Tees include sales commissions of $0.50
24、per shirt sold, a $20 artwork fee per design (paid to the companys artist), plus the following costs to acquire finished t-shirts from suppliers: T-shirts $3.00 per shirt Printing $0.50 per side, per color, per shirt for orders of 150 shirts $0.40 per side, per color, per shirt for orders of 51100 s
25、hirts $0.30 per side, per color, per shirt for orders of 101150 shirts $0.20 per side, per color, per shirt for orders greater than 150 shirts Screens $15 per screen (each design requires a separate screen for each color in the design; assume customers do not put the same design on the front and bac
26、k of a t-shirt) Shipping $0.60 per shirt 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
27、 computed as follows: T-shirts ($3 per shirt) $210.00 Sales commission ($0.50 per shirt) $35.00 Shipping ($0.60 per shirt) $42.00 Artwork design ($20 per design) $40.00 Printing ($0.40 per side, per color, per shirt, or in this case $1.60 per shirt) $112.00 Screens ($15 per screen) $60.00 Total vari
28、able costs (a) $499.00 Number of t-shirts (b) 70 Variable costs per t-shirt (a) . (b) $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-shir
29、ts if the best-case scenario 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 rev
30、iewed three current bid opportunities and their average order profile, they wondered what price per t-shirt to choose for each of these four scenarios. Order 1 Order 2 Order 3 Average order Number of t-shirts 30 60 300 50 Front of the shirt Number of art designs 1 1 1 1 Number of colors 1 2 2 1 Back
31、 of the shirt Number of art designs 1 0 1 1 Number of colors 2 0 2 1 Questions ：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
32、 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
33、 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 th
34、e 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 or
35、der profile, use your recommended selling price to determine the number of t-shirts that must be sold to break even. Also, prepare a contribution format income statement that shows University Tees net operating income if it sells 15,000 t-shirts at your recommended price. 8. Assume that all of Unive
36、rsity Tees sales conform to its average order profile. Prepare two contribution 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 relationship between price, quantity sold,
37、 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 s
38、implicity 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 analyz
39、e 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 understand how to compute a breakeven point. Fourth, they will need to understan
40、d how to prepare contribution 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 introduced to some fundamental pricing concepts, such as cost-plus pricing and market-b
41、ased 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. This section of the paper describes three approaches for teaching the case. First, the case can be used in a group-oriented or
42、al presentation format in 50 or 75-minute classes. Each group of students can be given the case study, including the discussion questions, at least one week before oral presentations will be given in class. The professor can require all of the groups to submit an electronic copy of their PowerPoint
43、slides 24 hours before the case will be presented in class by two groups. The professor can review the slideshows to identify and select two groups that have differing approaches to setting their prices. These two groups can then be asked to present their recommendations back-to-back in 1020 minute
44、intervals. The remaining class time can be used to discuss the differing points-ofview provided by the two groups of presenters. Second, the case can be assigned as a group-oriented research and writing assignment. The scope of this assignment can expanded beyond the specific facts of the University
45、 Tees case by requiring students to read one or more of the articles included in the annotated bibliography that accompanies the implementation guidance. These articles provide a platform for students to create a written report that not only analyzes the University Tees case, but also overviews prominent pricing insights and strategies used by real-world companies. Third, the case can be taught without providing the students the discussion questions in advance of class. With this app
