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27 October, 15:20

7. EB Company sells a large pack of "Cutie" diapers for $20. One pack of diapers requires two pounds of raw material and one hour of direct labor for 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 EB rents its factory for $4,000 per month. How many packs of diapers should EB sell every month to break even? a. 500. b. 400. c. 600. d. 800.

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  1. 27 October, 15:46
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    c. 600

    Explanation:

    One pack of diapers requires two pounds of raw material and one hour of direct labor for manufacture. Since Raw material costs $3 per pound and direct production labor is paid $4 per hour.

    Therefore the cost of producing one pack of diaper = 2 pounds ($3 per pound) + 1 hr ($4 per hour) = $6 + $4 = $10

    Since Fixed supervisory costs are $2,000 per month and EB rents its factory for $4,000 per month, the total expense for x diapers per month is given as:

    Expense = $2000 + $4000 + $10x = $10x + $6000

    The revenue generated by selling x diapers per month since one pack is sold at $20 is given as:

    Revenue = $20x

    At break even, Revenue = Expense

    Therefore: $10x + $6000 = $20x

    20x - 10x = 6000

    10x = 6000

    x = 6000/10 = 600

    EB would need to sell 600 diapers to break even
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