Question: Walker Corp. is a retail store that sells shoes and boots. In the past, it has bought all its shoes from a supplier for $15 per unit. However, Walker has the opportunity to acquire a small manufacturing facility where it could produce its own shoes. The projected data for producing its own shoes are as follows:
Sales price $25
Variable costs 5
Fixed costs 125,000
Required to do:
Q1. If Walker acquired the manufacturing facility, how many shoes would it have to produce in order to break even?
Q2. To earn an after tax profit of $100,000, how many shoes would Walker have to sell if it buys the shoes from the supplier? If it produces its own shoes? Walker’s tax rate is 35%.
Q3. Walker 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.