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 company will be profitable at $4 per unit.

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

3. Full capacity, the selling price must be greater than $5 per unit.
4. Excess capacity, the selling price must be greater than $9 per unit.

 

Answer:

Choice "d" is correct. At excess capacity, Chade will accept the special order as long as the sales price is greater than the variable cost per unit. At $9 per unit for variable cost, Chade will accept the special order at a sales price greater than $9 per unit.

Choice "a" is incorrect. At full capacity, Chade will accept the special order as long as the sales price is greater than both the variable cost per unit and the opportunity cost (contribution margin) of the next best alternative per unit. The company will not be profitable in this scenario unless the sales price is greater than $14 per unit ($9 variable cost + $5 contribution margin).

Choice "b" is incorrect. At excess capacity, the company must receive a selling price greater than $9 per unit in order to be profitable. Choice "c" is incorrect. At full capacity, the selling price must be greater than $14 per unit in order for the special order to be profitable.