At fictitious Chippenango State College, Bobby Fine (Ryan O'Neal) is a professor of English, who learns during a meeting with Chair Lincoln of the English Department (Fred Gwynne) that he is a candidate for tenure. During the meeting, Fine impresses Lincoln by responding in kind to an obscure line from William Shakespeare's The Merchant of Venice. Another professor (David Rounds) is amazed, and Bobby explains that with his father in the dress business, he'd always liked the play.
Meanwhile, in New York City, Bobby's father, Jack (Jack Warden) walks into luxury retailer Bergdorf Goodman attempting to steal customers with an armload of his own company's dresses before he is chased out by the manager (Michael Lombard). Back at his office, Jack checks in with his staff, and it becomes clear that his company, Fine Fashions, has excess inventory, poor designs, and high debt. When a buyer for another company (Jessica James) visits the office, Jack reluctantly arranges a sexual liaison with her to secure a sale. Additionally, he receives a phone call summoning him to a meeting with the imposing Mr. Eddie (Richard Kiel), a powerful loan shark and gangster holding a note on a $150,000 loan taken out by Jack, which has grown to a $1,500,000 debt. During the meeting, Jack confesses he can't pay, and Eddie takes over the business and force Bobby to run it.
Eddie's henchmen (Tony Sirico and Michael LaGuardia) kidnap Bobby and bring him to Jack's house, informing the Fines to meet with Eddie at his club. There, Bobby is struck by the beauty of Eddie's wife, Lira (Mariangela Melato). Bobby and Lira are strongly attracted to each other, and after suddenly kissing, Lira informs Bobby that she is open to infidelity.
The following day, a montage rolls as Bobby visits with the employees at Fine Fashions, attempting to learn the business. During the montage, a satirical song from the Ennio Morricone score (Union Label) plays as the employees smoke marijuana and generally laze about in comic fashion. The employees agree that Bobby is a fool.
At the end of the day, Lira invites Bobby into her limousine. She takes Bobby back to Eddie's mansion, and tells him that her marriage to Eddie is a loveless one, arranged to repay her own father's debts, and seduces him. Eddie comes home early, agitated because his game of pinball was interrupted by tilting. Bobby hides, while Lira hurls his clothing into the fireplace and hides his shoes in a house plant. After Eddie goes to sleep, Bobby is forced to wear an outfit of Lira's when he leaves. Outside, while inspecting the pinball machine smashed earlier by Eddie, the snug women's jeans tear; desperate to cover his exposure, Bobby stuffs wadded up-plastic into the seat. When he returns to the office, he stumbles into a group of garment buyers who have just dismissed Jack's latest fashions. They mistake Bobby's makeshift outfit for a new design and make huge orders for the jeans, which are dubbed "So Fine." Following is a commercial for the titular jeans, featuring models dancing and flashing their buttocks to the camera, interspersed with shots of women wearing the jeans (with the buttocks individually exposed through clear plastic windows) and driving men to distraction.
Bobby and his father are preparing to repay Eddie the $1,500,000. Bobby has returned to his professorship at Chippenango State College, and Jack has a meeting with Eddie at his house. Before Jack arrives, however, Bobby's shoe (previously hidden in a plant) falls and strikes him in the head. Reading the sole ("Chippenango Campus Shoes"), Eddie realizes that it belongs to Bobby. Lira flees to find Bobby, and Eddie rushes after her. When Jack arrives, the maid (Angela Pietropinto) tells him the situation, and Jack joins the chase.
Lira finds Bobby, and they plan to flee the country, but first attend a campus performance of Giuseppe Verdi's opera, Otello. During the performance, the soprano performing Desdemona (Judith Cohen) is struck ill, and Lira (whose own operatic ambitions had been frustrated by marrying Eddie) steps into the role, performing magnificently. Eddie arrives and knocks out the tenor playing Otello and assumes the role. As he joins Lira, Eddie also sings, but the subtitles do not reflect the action of the play, but rather that Eddie is there to kill Lira and Bobby. Eddie and Lira struggle back and forth, until Jack arrives and swings down on sandbags, knocking out Eddie. Much like with the So Fine jeans, the audience mistakes the performance for a revision of Verdi's original and applauds.
Later, Bobby and Lira are being propelled down the canals of Venice by a gondolier, and Bobby is reading a personal annulment of Lira and Eddie's marriage signed by Pope John Paul II (a farcical "marrigisimus annulum") and the camera pans to a gelato cart vendor serving a group of children. As the vendor turns away, it is seen that she is wearing So Fine jeans, and as she walks away, the credits roll.
Bobby's accidental creation, the revealing 'So Fine' jeans, becomes a sensation and rescues his father's business from financial ruin and mob control.
The ending punctuates the film's farcical tone by rewarding Bobby's mishaps with unexpected success, lampooning both the fickle nature of fashion trends and the absurdity of the situations he bumbles through. The Fine family emerges from their entanglements with organized crime thanks to a happy accident, underscoring the film's theme that sometimes fortune favors the foolish.
