Business Degree Certification Practice Test

To achieve a monthly gross profit of $1,000, how many pillows must Dreamland Pillow Company produce?

1. 300

2. 500

3. 600

4. 700

The correct answer is: 700

To determine how many pillows Dreamland Pillow Company must produce to achieve a monthly gross profit of $1,000, it is essential to understand the relationship between production, costs, and profit. Gross profit is calculated by subtracting the total costs of producing the goods sold from the revenue generated from those sales. In this scenario, the correct answer indicates that Dreamland Pillow Company needs to produce 700 pillows. This figure suggests that the company's costs and the selling price of the pillows are such that producing 700 units yields enough revenue to cover costs and leaves a profit margin of $1,000. To break this down, let’s assume that the selling price per pillow and the variable costs per pillow were determined through previous calculations or provided data regarding the company’s costs. Producing 700 pillows generates enough revenue to exceed the total costs (including fixed and variable costs) by $1,000. This implies that at a production level of 700 pillows, the contribution margin (the difference between the selling price and variable costs) is sufficient to allow for that level of profit. Understanding how to calculate gross profit is crucial, as it integrates concepts such as fixed costs, variable costs, and selling price, which are fundamental to managerial accounting and business operations.