CVP analysis with semifixed costs and changing unit variable costs. The Washington Company manufactures and sells crystal earrings. The sales price, $50 per unit, remains constant regardless of volume. Last year's sales were 15,000 units, and operating profits were $200,000. Fixed costs depend on production levels, as the following table shows. Variable costs per unit are 40 percent higher for level 2 (two shifts) than for level 1 (day shift only). The additional labor costs result primarily from higher wages required to employ workers for the night shift.
Annual Production Range (in units) Annual Total Fixed Costs
Level 1 (day shift) 0--20,000 $100,000
Level 2 (day and night shifts) 20,001--36,000 164,000
Washington expects last year's cost structure and selling price not to change this year. Maximum plant capacity is 36,000. The company sells everything it produces.
a. Compute the contribution margin per unit for last year for each of the two production levels.
b. Compute the break-even points in units for last year for each of the two production levels.
c. Compute the volume in units that will maximize operating profits. Defend your choice.