In February 1929 in Prohibition-era Chicago, Joe is a jazz saxophone player and an idealistic gambler and ladies’ man; his level-headed friend Jerry is a jazz double bass player. They work in a speakeasy (disguised as a funeral home) owned by gangster “Spats” Colombo. Tipped off by informant “Toothpick” Charlie, the police, led by treasury agent Mulligan, raid the joint. Joe and Jerry flee, only to accidentally witness Spats and his henchmen exacting revenge on “Toothpick” and his own gang (inspired by the real-life Saint Valentine’s Day Massacre). Poor and eager to get out of town, Joe and Jerry disguise themselves as women named Josephine and Daphne so they can join Sweet Sue and her Society Syncopators, an all-female band headed to Miami. They board a train with the band and its male manager, Bienstock. Joe and Jerry notice Sugar Kane, the band’s vocalist and ukulele player.
Joe and Jerry become obsessed with Sugar and compete for her affection while maintaining their disguises. Sugar confides to Joe that she has sworn off male saxophone players, who have stolen her heart in the past and left her with “the fuzzy end of the lollipop”. She has set her sights on finding a gentle, bespectacled millionaire in Florida. During the forbidden drinking and partying on the train, Josephine and Daphne become close friends with Sugar, and must struggle to remember that they are supposed to be girls and cannot make passes at her.
Once in Miami, Joe woos Sugar by assuming a second disguise as millionaire Junior, the heir to Shell Oil, while feigning indifference to her. An actual millionaire, the much-married aging mama’s-boy Osgood Fielding III, tries repeatedly to pick up Daphne, who rejects him. Osgood invites Daphne for a champagne supper on his yacht, New Caledonia. Joe convinces Daphne to keep Osgood occupied onshore so that Junior can take Sugar to Osgood’s yacht, passing it off as his own. Once on the yacht, Junior explains to Sugar that psychological trauma has left him impotent and frigid, but that he would marry anyone who could change that. Sugar tries to arouse sexual response in Junior, and begins to succeed. Meanwhile, Daphne and Osgood dance the tango (“La Cumparsita”) till dawn. When Joe and Jerry get back to the hotel, Jerry announces that Osgood has proposed marriage to Daphne and that he, as Daphne, has accepted, anticipating an instant divorce and huge cash settlement when his ruse is revealed. Joe convinces Jerry that he cannot actually marry Osgood.
The hotel hosts a conference for “Friends of Italian Opera”, which is in fact a major meeting of the national crime syndicate, presided over by “Little Bonaparte”. Spats and his gang from Chicago recognize Joe and Jerry as the witnesses to the Valentine’s Day murders. Joe and Jerry, fearing for their lives, realize they must quit the band and leave the hotel. Joe breaks Sugar’s heart by telling her that he, Junior, must marry a woman of his father’s choosing and move to Venezuela. Joe and Jerry evade Spats’ men by hiding under a table at the syndicate banquet. “Little Bonaparte” has Spats and his men killed at the banquet; again, Joe and Jerry are witnesses and they flee through the hotel. Joe, dressed as Josephine, sees Sugar onstage singing that she will never love again. He kisses her before he leaves, and Sugar realizes that Joe is both Josephine and Junior.
Jerry persuades Osgood to take “Daphne” and “Josephine” away on his yacht. Sugar runs from the stage at the end of her performance and jumps aboard Osgood’s launch just as it is leaving the dock with Joe, Jerry, and Osgood. Joe tells Sugar that he is not good enough for her, that she would be getting the “fuzzy end of the lollipop” yet again, but Sugar wants him anyway. Meanwhile, Jerry lists reasons why “Daphne” and Osgood cannot marry, ranging from a smoking habit to infertility. Osgood dismisses them all; he loves Daphne and is determined to go through with the marriage. Exasperated, Jerry removes his wig and shouts, “I’m a man!” Osgood, unfazed, simply responds: “Well, nobody’s perfect”, to Jerry’s confusion.