Dreamland Pillow Company sells the Old Softy model for $20 each. One pillow need

Question

Dreamland Pillow Company sells the Old Softy model for $20 each. One pillow needs two pounds of raw material as well as one hour of direct labour to manufacture. Raw material costs $3 per pound as well as direct production labour is paid $4 per hour. Fixed supervisory costs are $2000 per month as well as Dreamland rents its factory on a five-year lease for $4,000 per month. All costs are deliberated costs of production. How many pillows should Dreamland produce and sell each month to earn a monthly gross profit of $1,000?

Another firm has offered to produce "Old Softy" pillows and sell then to Dreamland for $12 each. Dreamland cannot avoid the factory lease payments, but can avoid all labor cost if it does not produce these pillows. Under these conditions, how many "Old Softy" pillows must Dreamland sell to earn montly gross profits of $1000?

(A.) 300 (b) 350 (c) 600 (d) 700

Explanation / Answer

D: Dreamland should sell the 700 units under production for earning Gross Profit $1000 , but under offer of the firm requirment of sale of 625 units , calculation as above.

Break Even Point Of Dreamland under production Amount in $ Amount in $ Selling price $ 20 Less=Variable cost           Raw Material (2ponds*1*$3/ponds) $                    6           Direct Labour $4/hour $                    4 $ 10 Contribution per unit $ 10 Fixed cost: Fixed supevisory cost $           2,000 Factory rent $           4,000 $ 6,000 Gross Profit $ 1,000 Break Even Point (Fixed cost+Gross profit)/Contribution per unit 700 units Break even point under offer Selling Price $                20 less; purchase price $                12 Contribution per unit $                  8 Fixed cost : Factory rent $ 4,000 Gross Profit $ 1,000 Break Even Point (Fixed cost+Gross profit)/Contribution per unit 625 units

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