Question - Fashions, Inc. is a retail store that sells sweaters and jackets. In the past, it has bought all its sweaters from a supplier for $20 per unit. However, Fashions has the opportunity to acquire a small manufacturing facility where it could produce its own sweaters. The projected data for producing its own sweaters are as follows:
Sales Price = $30
Variable Cost = $15
Fixed Cost = $150,000
Required
1) If Fashions acquired the manufacturing facility, how many sweaters would it have to produce in order to break even?
2) To earn an after tax profit of $125,000, how many sweaters would Fashions have to sell if it buys the sweaters from the supplier? If it produces its own sweaters? Fashion's tax rate is 30%.
3) Fashions, Inc. is indifferent between the two alternatives at sales of how many units (ignore income tax effects)? Show a computation of operating income to prove your answer.