Question

Dreamland Pillow Company sells the "Old Softy" model for $20 each. One pillow requires two pounds of raw material and one hour of direct labor to manufacture. Raw material costs $3 per pound and direct production labor is paid $4 per hour. Fixed supervisory costs are $2,000 per month and Dreamland rents its factory on a five-year lease for $4,000 per month. All costs are considered costs of production.

How many pillows must Dreamland produce and sell each month to earn a monthly gross profit of $1,000?


a) 300
b) 350
c) 600
d) 700

Answer 1

Dreamland must produce and sell 700 pillows each month to earn a monthly gross profit of $1,000.

Step-by-step explanation:

To calculate the number of pillows Dreamland must produce and sell each month to earn a monthly gross profit of $1,000, we need to consider all costs involved in production. Firstly, let's calculate the total variable cost per pillow. The raw material cost is $3 per pound and each pillow requires two pounds, so the raw material cost per pillow is $6. The direct labor cost is $4 per hour and it takes one hour to manufacture each pillow, so the direct labor cost per pillow is $4. Therefore, the total variable cost per pillow is $6 + $4 = $10.

Next, we need to calculate the total fixed cost. The fixed supervisory costs are $2,000 per month and the factory rent is $4,000 per month, so the total fixed cost is $2,000 + $4,000 = $6,000.

To determine the number of pillows Dreamland must produce and sell, we can use the following formula:

Number of pillows = (Total fixed cost + Desired profit) / Contribution margin per pillow

Using the given information, the desired profit is $1,000 and the contribution margin per pillow is the selling price ($20) minus the variable cost per pillow ($10), which is $10. Plugging in these values, we get:

Number of pillows = ($6,000 + $1,000) / $10 = 700

Therefore, Dreamland must produce and sell 700 pillows each month to earn a monthly gross profit of $1,000.