Dreamland pillow company sells the \"old softy\" model for $20 each. One pillow

Question

Dreamland pillow company sells the "old softy" model for $20 each. One pillow requires two pounds of raw materials 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 pillow must 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 them to Dreamland for S12 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?

Explanation / Answer

DreamLand Pillow A Details Amt $ Unit contribution of Oil Softy pillow Sales price per unit                           20 Less Variable costs Direct material /unit(2lb @$3/lb)                             6 Direct Labor /Unit91 hrs@$4/hr)                             4 Total Unit variable cost                           10 Unit Contribution Margin=20-10=                           10 Total Fixed costs per month Supervisor's salary                     2,000 Lease Rental -Factory                     4,000 Total Fixed cost per month                     6,000 Required gross profit per month=                     1,000 Total required contribution margin in month=                     7,000 Unit Contribution Margin                           10 Required sales & Production=7000/10=                         700 per month B If Old softy purchased from outside Unit contribution of Oil Softy pillow Sales price per unit                           20 Less Variable costs Purchase cost of pillow                           12 Total Unit variable cost                           12 Unit Contribution Margin=20-10=                             8 Total Fixed costs per month Lease Rental -Factory                     4,000 Total Fixed cost per month                     4,000 Required gross profit per month=                     1,000 Total required contribution margin in month=                     5,000 Unit Contribution Margin                             8 Required sales & Production=5000/8=                         625 nos per month

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