roblem Set
Page 2 of 4
Problem 2: CONTRIBUTION MARGIN / BREAKEVEN
The Dharma Initiative manufactures and sells one product, cages for polar bears. The sales price, 
$60 per unit (the cages are not high quality ones), remains constant regardless of volume. Last 
year’s sales were 10,000 units, and it had an operating loss of $50,000 (i.e., -$50,000).
Dharma can produce up to 15,000 units per year operating with only a day shift. With only a day 
shift operating (which was the case last year), fixed costs are $250,000 per year. If demand 
exceeds 15,000 units, Dharma can also operate a night shift to produce up to an additional 
10,000 units. Additional fixed costs to run the night shift are $100,000 per year. Due to its union 
contract (and the fact that it has to move all the workers to its factory, which is on an island in 
the Pacific), Dharma must operate the night shift for the entire year or not at all. It cannot operate 
the night shift for only a portion of a year. Last year it operated only a day shift.
Variable costs per unit are 20 percent higher during the night shift than the day shift because of 
the higher wages required for night shift workers under the union agreement.
Last year’s cost structure and selling price are not expected to change this year. The company 
sells everything it produces.
Required: 
a) Compute the contribution margin per unit for each shift.
b) Compute the break-even point(s).
c) Compute the volume in units that will maximize operating profits.