Klay, Inc. is a retail store that sells sweaters and jackets. In the past, it ha
ID: 2525564 • Letter: K
Question
Klay, 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, Klay 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:
a. If Klay acquired the manufacturing facility, how many sweaters would it have to produce in order to break even?
b. To earn a profit of $125,000 per month, how many sweaters would Klay have to sell if it buys the sweaters from the supplier? If it produces its own sweaters?
c. 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 to prove your answer.
Selling Price Per Unit $30.00 Variable Cost Per Unit $15.00 Total Fixed Costs (per month) $150,000Explanation / Answer
1) Break even units = fixed cost/contribution margin per unit 150,000/(30-15) 10000 Sweaters' 2) is buys from supplier = 125000/10 12500 sweaters if produces own (150,000+125000)/15 18333.33 3) indifference point 10x = 15x - 150,000 x = 150,000/5 30000 sweaters it will be indifferent supplier manufacturer sales 30 per unit 900000 900000 less variable cost 600000 450000 contribution 300,000 450000 Fixed cost 0 150,000 net income 300,000 300,000
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