Questions 4-5 are based on the following information.
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.
4. How many pillows must Dreamland produce and sell each month to earn a monthly gross profit of $1,000?
5. Another firm has offered to produce "Old Softy" pillows 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?
For question 4, the answer is 700 units and this is how you get the correct answer:
Sales price = $20
Minus variable costs which is -10 (we ...
The number of pillows to sell to make a certain gross profit determines is examined.