Reference no: EM132709582

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 and had no fixed costs for this line of clothing. 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:

Selling price per unit $30.00

Variable cost per unit $15.00

Total fixed costs (per month) $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 (πA) of $125,000 per month, how many sweaters would Fashions have to sell if it buys the sweaters from the supplier? If it produces its own sweaters? Fashion's combined income tax rate, t, is 30%.

3. What is the profit-indifference sales volume in terms of the two options under consideration? (Ignore income tax effects.) Show a computation of operating income (πB) to prove your answer.