Is Vertical Integration Profitable for Katie's Quilts?
How many quilts does Katie need to sell for vertical integration to be a profitable decision?
To determine the number of quilts Katie needs to sell for vertical integration to be a profitable decision, we need to compare the costs and revenues associated with the two options: purchasing quilts from a producer versus making her own quilts.
The fixed cost of vertically integrating is given as $20,000. This cost is incurred regardless of the number of quilts produced.
After integrating, Katie can produce quilts at a cost of $50 per quilt. This is her variable cost per unit.
Currently, Katie purchases quilts for $100 each from a large producer. This is her cost of goods sold.
To calculate the breakeven point, we need to find the quantity of quilts at which the cost of vertically integrating is equal to the cost of purchasing quilts from the producer.
Let's denote the breakeven quantity as Q.
For vertically integrating:
Total Cost = Fixed Cost + (Variable Cost per Unit * Quantity)
Total Cost = $20,000 + ($50 * Q)
For purchasing from the producer:
Total Cost = Cost of Goods Sold * Quantity
Total Cost = $100 * Q
Setting these two equations equal to each other:
$20,000 + ($50 * Q) = $100 * Q
Simplifying the equation:
$20,000 = $50 * Q
Q = $20,000 / $50
Q = 400
Therefore, Katie needs to sell 400 quilts for vertical integration to be a profitable decision, where the cost of producing her own quilts is equal to the cost of purchasing them from the producer.
Understanding the Breakeven Point for Vertical Integration
Vertical integration is a strategy where a company expands its business operations along the supply chain, controlling multiple stages of production or distribution. In Katie's case, vertical integration involves producing her own quilts rather than purchasing them from an external producer.
The breakeven point is the quantity of quilts at which the cost of vertically integrating is equal to the cost of purchasing quilts from the producer. This point is crucial for Katie to make an informed decision about whether vertical integration is a profitable choice for her business.
By calculating the total costs associated with both options, Katie can determine the threshold at which producing her own quilts becomes financially advantageous. In this scenario, the fixed cost of $20,000 for vertical integration and the variable cost of $50 per quilt are key factors in the calculation.
Once the breakeven quantity of 400 quilts is identified, Katie can set targets for sales and production to ensure that the decision to vertically integrate aligns with her business goals and profitability objectives.
Understanding the breakeven point allows Katie to assess the risks and benefits of vertical integration and make strategic choices that will drive the success of Katie's Quilts in the competitive market of quilts and bed linen products.