Question

Sweet Dreams sells 15,000 pillows per year for $25 per unit. Variable cost per unit is $14. Sweet Dreams wants to improve customer satisfaction by using higher quality direct materials which will increase the variable cost per unit to $19. Fixed costs per year total $90,000. If sales increase by 5,000 units per year, what price will Sweet Dreams have to charge to earn the same profit it is earning now ($75,000 per year)

Answer 1

Answer:  The answer is $27.25

Explanation:

Let x be the price Sweet dreams will charge to earn the profit of $75,000

New sales units = 20,000

New variable cost = $19

We know, Sales - Variable cost - Fixed cost = Profit

Now applying the equation,

 20,000x - (20,000*19) - 90,000 = $75000

 20,000x = $75,000 + 380,000 + 90,000

therefore, x = $27.25

So, Sweet Dreams will charge $27.25 to earn the same profit it is earning now i.e. $75000 per year.