Section Case Study: Read “George’s T-Shirts” beginning on page 267 and analyze the following questions:
For the last six years,George Lassiter, aproject engineer for amajor defensecontractor, had enjoyedan interesting andlucrative side business—designing, manufacturing,and hawking“special event”t-shirts. He had createdshirts for a variety of rock concerts, major sportingevents, and special fund-raising events. Although hist-shirts were not endorsed by the event sponsors andwere not allowed to be sold within the arenas atwhich the events were held, they were cleverlydesigned, well produced, and reasonably priced(relative to the official shirts). They were sold in thestreets surrounding the arenas and in the nearbyparking lots, always with the appropriate licensesfrom the local authorities. Lassiter had a regularcrew of vendors to whom he sold the shirts onconsignment for $100 per dozen. These vendors thenoffered the shirts to the public at $10 apiece.A steady stream of t-shirt business came toLassiter, and he was generally working on severaldesigns in various stages of development. His currentproblem centered around the number of shirts heshould have stenciled for a rock concert that wasscheduled to be staged in two months.This concert was almost certain to be a huge success.Lassiter had no doubt that the 20,000 tickets for the standing area around the stage would be instantly boughtby the group’s devoted fans. The major unknown was thenumber of grandstand seats that would be sold. It couldbe anywhere from a few thousand to more than doublethe number of standing tickets. Given the popularity ofthe performing group and the intensity of the advancehype, Lassiter believed the grandstand sales were morelikely to be at the high rather than the low end of thespectrum. He decided to think in terms of threepossibilities (a high, a medium, and a low value),specifically, 80,000, 50,000, and 20,000 grandstandseats. Despite his optimism, he believed that 50,000 wasas likely as either of the other two possibilities combined.The two extreme numbers were about equally likely;maybe 80,000 was a little more likely than 20,000.A second unknown was the percentage of theattendees who would buy one of his shirts. To thecredit of his designs and the quality of the shirts, thenumber generally (about 6 times out of 10) ran about10 percent of the attendance, but sometimes it was inthe range of 5 percent. On a rare occasion, sales wouldbe in the vicinity of 15 percent (maybe 1 time out of 10,if Lassiter’s memory served him right).Several weeks ago, Lassiter had requested a costestimate for this concert’s design from the silk screener/shirt supply house with which he had been working forseveral years. He used this particular firm almostexclusively, because he had found it to be reliable inboth quality and schedule and to have reasonable
prices. The estimate had arrived yesterday. It waspresented in the usual batches of 2,500 shirts with theusual volume discounts:
Order Size – 10000 , 7500, 5000
Cost – $32,152 , $25,250 , $17,750
The order had to be one of the quoted multiples of2,500 shirts.On the basis of his volume estimates, Lassiter wasprepared to place an order for 5,000 shirts. With his salesgenerally about 10 percent of attendance, he didn’t believe he could justify an order for 7,500 shirts. Such anorder would require the concert’sattendancetobe75,000, and while he was optimistic about the popularityof the event, he wasn’t quite that optimistic. Also, in thepast,hehad takenthe conservativeroute and ithad servedhim well. He had never had an appreciable number ofshirts left over, but those that were left were sold to adiscount clothing chain for $1.50 per shirt.
1.What are the possible financial outcomes if Lassiter orders 5000 T-shirts? 7,500? 10,000?
2.How many T-shirts should Lassiter order?