Question

Chade Corp. is considering a special order brought to it by a new client. If Chade determines the variable cost to be​ $9 per​ unit, and the contribution margin of the next best alternative of the facility to be​ $5 per​ unit, then if Chade​ has:

A. Full​ capacity, the selling price must be greater than​ $5 per unit.

B. Excess​ capacity, the selling price must be greater than $9 per unit.

C. Full​ capacity, the company will be profitable at​ $4 per unit.

D. Excess​ capacity, the company will be profitable at​ $6 per unit.

Answer 1

Chade Corp. should set the selling price greater than $9 per unit if it has excess capacity. Hence, the correct answer is option (B).

Step-by-step explanation:

In this scenario, Chade Corp. is considering a special order brought by a new client. If Chade determines the variable cost to be $9 per unit, and the contribution margin of the next best alternative of the facility is $5 per unit, we can determine the selling price required to be profitable based on the company's capacity.

If Chade has full capacity, the selling price must be greater than $5 per unit, as the contribution margin should cover the variable costs. On the other hand, if Chade has excess capacity, then the selling price must be greater than $9 per unit, as the contribution margin should cover the variable costs and additionally contribute towards fixed costs.

Therefore, the correct answer is B. Excess capacity, the selling price must be greater than $9 per unit.