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:

Selling Price Per Unit	$30.00
Variable Cost Per Unit	$15.00
Total Fixed Costs (per month)	$150,000

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.

Answer 1

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