Question Three Fashions, Inc. is a retail store that sells sweaters and jackets.

Question

Question Three Fashions, Inc. is a retail store that sells sweaters and jackets. In the past. It ha a supplier for $20 per unit and had no fixed costs for tnis line of could produce its own sweaters. The projected data for producing ts clothing. However, Fashions has the opportunity to acquire a small manufacturing own sweaters are as follows: Selling price per unit S30.00 $15.00 $150,000 Variable cost per unit Total fixed costs (per month) Required: 1. If Fashions acquired the manufacturing facility, how many sweaters would it have to produce in order to break even? (Round your answer up, to the nearest whole number.) 2. To earn an after tax profit (TA) 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 is 30%. (Round your answers up, to sweaters? Fashion's com bined income tax rate, the nearest whole number.) 3. What is the profit-indifference sales volume in terms of the two options under consideration? (Ignore income tax effects.)

Explanation / Answer

Answer 1 No.of sweaters to be produced in order to have break even = Fixed cost / [Selling price - Variable cost] No.of sweaters to be produced in order to have break even = $150000 / [$30 - $15] = 10000 sweaters If Fashions aquires the manufacturing facility , it has to produce 10000 sweaters in order to break even. Answer 2 Fashions buyes sweaters from suppliers - no.of sweaters to be sold in order to earn a after tax profit of $125000 No.of sweaters to be sold = [after tax profit / (1-Tax rate)] / [selling price per sweater - Cost of purchase per sweater] No.of sweaters to be sold = [$125000 / (1-0.30)] / [$30-$20] No.of sweaters to be sold = 17857 Fashions produce its own sweaters - no.of sweaters to be sold in order to earn a after tax profit of $125000 No.of sweaters to be sold = {[after tax profit / (1-Tax rate)]+Fixed cost} / [Selling price - Variable cost] No.of sweaters to be sold = {[$125000 / (1-0.30)]+$150000} / [$30 - $15] No.of sweaters to be sold = 21905 Answer 3 Let us assume profit indifference sales volume be x. Profit under Purchase option = Profit under Produce option 15x - 150000 = 10x 5x = 150000 x = 30000 sweaters Profit indifference sales volume in terms of two option is 30000 sweaters.

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