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.

Another firm has offered to produce "Old Softy" and sell them to Dreamland for $12 each. Dreamland cannot avoid the factory lease payments, but can avoid all labor costs if it does not produce these pillows. Under these conditions, how many "Old Softy" pillows must Dreamland sell to earn monthly gross profits of $1,000?


a) 417
b) 500
c) 625
d) 875

Answer 1

Dreamland Pillow Company needs to sell 7,000 'Old Softy' pillows to earn a monthly gross profit of $1,000.

Step-by-step explanation:

To calculate the number of 'Old Softy' pillows Dreamland Pillow Company needs to sell to earn a monthly gross profit of $1,000, we need to consider the costs and revenue associated with the production and sale of the pillows.

First, let's calculate the variable cost per pillow. One pillow requires 2 pounds of raw material, which costs $3 per pound, so the variable cost per pillow is 2 * $3 = $6. Additionally, one pillow requires 1 hour of direct labor, which costs $4 per hour, so the variable cost per pillow is $6 + $4 = $10.

Next, let's consider the fixed costs. The fixed supervisory costs are $2,000 per month, and the factory lease payments are $4,000 per month.

To earn a monthly gross profit of $1,000, we need to cover both the variable costs and the fixed costs. Let's denote the number of pillows sold as 'x'. The revenue from selling 'x' pillows would be $12 * 'x' (since Dreamland is buying the pillows from another firm for $12 each).

Therefore, the equation to represent the gross profit is:

$12x - $10x - $2,000 - $4,000 = $1,000

Simplifying this equation, we get:

$2x - $6,000 = $1,000

$2x = $7,000

x = $7,000 / $2 = 3,500.

However, the question asks for the number of pillows Dreamland Pillow Company needs to sell, not buy. Since they are buying the pillows for $12 each, they would need to sell twice as many pillows to cover the costs.

Thus, Dreamland Pillow Company needs to sell 2 * 3,500 = 7,000 'Old Softy' pillows to earn a monthly gross profit of $1,000.