# Chapter 3 Guided Practice

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## 3GP.1 Contribution Margin

### 3GP.1.E1

A firm has \$2,000,000 in revenue and \$1,000,000 in total costs for a given period. 60% of the firm’s total costs are variable costs. The firm produces and sells 6,000 units during the period.

Required

(A) What is the firm’s total contribution margin?

(B) What is the firm’s unit contribution margin (round to cents if necessary)?

(C) What is the firm’s contribution margin ratio?

### 3GP.1.M1

A firm sells a product for \$16 per unit (for a total of \$100,000 in total revenue). Each unit costs \$3.50 in variable costs (for a total of \$21,875 in total variable costs).

Required

(A) What is the product’s total contribution margin?

(B) What is the firm’s contribution margin ratio ?

(C) What is the firm’s unit contribution margin (round to cents if necessary)?

## 3GP.2.E1

Last year the firm sold 18,000 units for total revenue of \$450,000. Each unit incurred \$20 in variable costs. The firm incurred \$50,000 of fixed costs. The firm’s fixed costs and CM ratio will remain the same this year.

Required

(A) What was the firm’s margin of safety last year in sales units?

(B) What was the firm’s contribution margin ratio and degree of operating leverage last year?

(C) How many unit sales and total revenue does the firm need to earn to reach a target profit of \$150,000 (assume the firm’s cost structure remains the same)?

(D) How much total revenue did the firm need to earn to breakeven last year?

## 3GP.3 Multi-product CVP

### 3GP.3.E1

A firm has two products, product 1 and product 2, which it sells in the ratio of 2:3. Product 1 sells for a price of \$120 per unit and has \$100 of variable cost per unit. Product 2 sells for a price of \$55 per unit and has variable costs of \$30. The firm’s fixed costs are \$70,000.

Required

(A) How many units of Product 2 does the firm have to sell if it aims to earn \$200,000 in profit?

(B) How many dollars of Product 1 revenue does the firm need to sell to breakeven?

### 3GP.3.M1

A firm earned \$2,750,000 in revenue last year and had a degree of operating leverage of 2. The firm also incurred \$250,000 in fixed costs. The firm sells three products in a 1:5:3 ratio. (Assume the firm’s cost structure and sales mix remain the same this year.)

Required

(A) If there is enough information provided above, what is the total revenue required for the firm to reach a target profit of \$1,000,000 this year? If there is not enough information provided, what information is missing?

(B) What was the firm’s margin of safety last year (in sales dollars)?

## 3GP.4 Special-Order

### 3GP.4.E1

A firm is considering a special order for 500 units of product TY365. TY365 sells on the external market for \$100 and costs \$50 in variable costs.

Required

(A) Assuming the firm has plenty of excess capacity and no extra costs are required to complete the special order, what is the minimum price for the special order?

(B) Still assuming plenty of excess capacity but now assuming \$10,000 of extra costs are required to complete the special order, what is the minimum price for the special order?

(C) Still assuming plenty of excess capacity but now assuming \$27,500 of extra costs are required to complete the special order, what is the minimum price for the special order?

### 3GP.4.M1

A firm is considering a special order for 1,000 units of product MG721. MG721 sells on the external market for \$100 and costs \$60 in variable costs.

(A) Assuming the firm has plenty of excess capacity and no extra costs are required to complete the special order, what is the minimum price for the special order?

(B) Still assuming no extra costs but now assuming the firm only has excess capacity for 250 units, what is the minimum price for the special order?

(C) If the firm only has excess capacity for 250 units and must incur a cost of \$12,000 extra costs to complete the special order, what is the minimum price for the special order?

## 3GP.5 Constrained Resource Decisions

### 3GP.5.E1

A firm produces two products. Both products require inspection from a small number of certified inspection personnel in the firm. In total, these employees can provide just 100 inspection hours in a given period.

Product 1 is sold for \$150 per unit, and each unit incurs \$25 of variable cost. Product 2 sells for \$75 per unit, and each unit incurs \$25 of variable cost. However, each unit of Product 1 takes 0.5 inspection hours, while each unit of Product 2 takes 0.1 inspection hour.

Demand for the two products is effectively fixed at 150 units of Product 1 and 600 units of Product 2.

Required

How many units of each product will the firm optimally produce?