/*! This file is auto-generated */ .wp-block-button__link{color:#fff;background-color:#32373c;border-radius:9999px;box-shadow:none;text-decoration:none;padding:calc(.667em + 2px) calc(1.333em + 2px);font-size:1.125em}.wp-block-file__button{background:#32373c;color:#fff;text-decoration:none} Problem 17 Chade Corp. is considering a spe... [FREE SOLUTION] | 91影视

91影视

Log out

Learning Materials

Features

Discover

Chapter 11: Problem 17

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. c. Full capacity, the selling price must be greater than \(\$ 5\) per unit. d. Excess capacity, the selling price must be greater than \(\$ 9\) per unit.

Short Answer

Expert verified
The correct answer is: d. Excess capacity, the selling price must be greater than \(\$ 9\) per unit.

Step by step solution

01

Understand the terms

Variable cost is the cost that varies in direct proportion to the number of units produced. Contribution margin is the difference between the selling price and variable cost per unit. It shows how much money the company makes from the sale of one unit, excluding fixed costs. Full capacity means the company is producing at its maximum capacity, while excess capacity means the company has room for producing more.
02

Analyze each option

a. Full capacity, the company will be profitable at \(\$ 4\) per unit. To determine profitability, we need to compare the potential selling price with the sum of the variable cost and opportunity cost (the contribution margin of the next best alternative): Selling price = Variable cost + Contribution margin of the next best alternative \$4 = \$9 + \$5 This equation doesn't hold, so the company won't be profitable at $4 per unit. This statement is incorrect. b. Excess capacity, the company will be profitable at \(\$ 6\) per unit. In this scenario, Chade has excess capacity, so the opportunity cost of not using the facility for the next best alternative is irrelevant. We just need to compare the selling price with the variable cost, Selling price = Variable cost \$6 = \$9 This equation doesn't hold, so the company won't be profitable at $6 per unit. This statement is incorrect. c. Full capacity, the selling price must be greater than \(\$ 5\) per unit. In this scenario, Chade is at full capacity, so the opportunity cost should be considered. The company would be profitable only if the selling price is greater than the sum of the variable cost and the contribution margin of the next best alternative: Selling price > Variable cost + Contribution margin of the next best alternative Selling price > \$9 + \$5 Selling price > \$14 Here, we only know that the selling price has to be greater than \$5, not greater than the sum of the variable cost and the contribution margin of the next best alternative. So, this statement is incorrect. d. Excess capacity, the selling price must be greater than \(\$ 9\) per unit. In this scenario, Chade has excess capacity so the opportunity cost of not using the facility for the next best alternative is irrelevant. We just need to compare the selling price with the variable cost: Selling price > Variable cost Selling price > \$9 This statement is correct, as the selling price must be greater than the variable cost of \$9 per unit for Chade to be profitable in a situation with excess capacity.
03

Conclusion

The correct answer is: d. Excess capacity, the selling price must be greater than \(\$ 9\) per unit.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with 91影视!

Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Variable Cost
In cost accounting, the variable cost refers to the expenses that change in direct proportion to the production volume. For each unit produced, these costs increase incrementally. Examples include raw materials and direct labor. Variable costs are crucial when determining the minimum selling price of a product. If Chade Corp. has a variable cost of $9 per unit, then any price below this amount would mean the company is not covering these costs on each sale. It's important, especially when analyzing scenarios with excess production capacity, to ensure that the selling price exceeds the variable cost to avoid losses.
Contribution Margin
The contribution margin is a vital metric that represents the difference between sales revenue and variable costs. It shows how much of the sales revenue is available to cover fixed costs and contribute to profits. The formula for contribution margin per unit is:
  • Contribution Margin per Unit = Selling Price per Unit - Variable Cost per Unit
In the case of Chade Corp., if a competing opportunity provides a contribution margin of $5 per unit, this figure becomes an opportunity cost when Chade is at full capacity. As such, any consideration for profitability should weigh this alternative contribution margin, ensuring that a new project yields at least the same or higher margin to justify choosing it over other prospects.
Capacity Utilization
Capacity utilization is a measure of how much of a company's production capacity is being used. This concept is crucial in strategic decision-making, especially when evaluating special orders. Full capacity means all resources are committed, and there's no room for producing more without sacrificing other opportunities. Excess capacity, on the other hand, indicates that there is available facility usage, which can absorb new projects without disruption.
For Chade Corp., the implications of their capacity status are significant. If running at full capacity, any extra production must consider the opportunity cost 鈥� this means evaluating what profits could be made from alternate uses of that capacity. In contrast, with excess capacity, the focus shifts solely to covering the variable costs of production, since no opportunity is foregone.
Profitability Analysis
Profitability analysis involves assessing whether a company will gain financially from a particular business decision. This is performed by analyzing potential revenues against associated costs, both fixed and variable. For Chade Corp., profitability analysis includes examining various scenarios concerning production capacity and pricing.
When an entity is operating at full capacity, the analysis must consider both the direct costs of production and the opportunity costs 鈥� like foregone contributions from other potential orders. In contrast, with excess capacity, profitability primarily relies on ensuring that the selling price per unit exceeds the variable cost, as there are no opportunity costs involved. Successful profitability analysis helps in making informed decisions about special orders or pricing strategies that align with the company's financial goals.

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Best Trim, a manufacturer of lawn mowers, predicts that it will purchase 204,000 spark plugs next year. Best Trim estimates that 17,000 spark plugs will be required each month. A supplier quotes a price of \(\$ 9\) per spark plug. The supplier also offers a special discount option: If all 204,000 spark plugs are purchased at the start of the year, a discount of \(2 \%\) off the \(\$ 9\) price will be given. Best Trim can invest its cash at \(10 \%\) per year. It costs Best Trim \(\$ 260\) to place each purchase order. 1\. What is the opportunity cost of interest forgone from purchasing all 204,000 units at the start of the year instead of in 12 monthly purchases of 17,000 units per order? 2\. Would this opportunity cost be recorded in the accounting system? Why? 3\. Should Best Trim purchase 204,000 units at the start of the year or 17,000 units each month? Show your calculations. 4\. What other factors should Best Trim consider when making its decision?

Ace Cleaning Service is considering expanding into one or more new market areas. Which costs are relevant to Ace's decision on whether to expand?

(N. Melumad, adapted) Gormley Precision Tools makes cutting tools for metalworking operations. It makes two types of tools: \(A 6\), a regular cutting tool, and EX4, a highprecision cutting tool. A6 is manufactured on a regular machine, but EX4 must be manufactured on both the regular machine and a high- precision machine. The following information is available: Additional information includes the following: a. Gormley faces a capacity constraint on the regular machine of 50,000 hours per year. b. The capacity of the high-precision machine is not a constraint. c. \(0 f\) the \(\$ 1,100,000\) budgeted fixed overhead costs of \(E X 4, \$ 600,000\) are lease payments for the highprecision machine. This cost is charged entirely to EX4 because Gormley uses the machine exclusively to produce EX4. The company can cancel the lease agreement for the high-precision machine at any time without penalties. All other overhead costs are fixed and cannot be changed. 1\. What product mix- that is, how many units of \(A 6\) and \(E X 4\) -will maximize Gormley's operating income? Show your calculations. 2\. Suppose Gormley can increase the annual capacity of its regular machines by 15,000 machine-hours at a cost of \(\$ 300,000\). Should Gormley increase the capacity of the regular machines by 15,000 machinehours? By how much will Gormley's operating income increase or decrease? Show your calculations. 3\. Suppose that the capacity of the regular machines has been increased to 65,000 hours. Gormley has been approached by Clark Corporation to supply 20,000 units of another cutting tool, \(\mathrm{V} 2,\) for \(\$ 240\) per unit. Gormley must either accept the order for all 20,000 units or reject it totally. V2 is exactly like \(A 6\) except that its variable manufacturing cost is \(\$ 130\) per unit. (It takes 1 hour to produce one unit of \(V 2\) on the regular machine, and variable marketing cost equals \(\$ 20\) per unit.) What product mix should Gormley choose to maximize operating income? Show your calculations.

Describe two potential problems that should be avoided in relevant-cost analysis.

(A. Atkinson, adapted) Denver Engineering manufactures small engines that it sells to manufacturers who install them in products such as lawn mowers. The company currently manufactures all the parts used in these engines but is considering a proposal from an external supplier who wishes to supply the starter assemblies used in these engines. The starter assemblies are currently manufactured in Division 3 of Denver Engineering. The costs relating to the starter assemblies for the past 12 months were as follows: Over the past year, Division 3 manufactured 150,000 starter assemblies. The average cost for each starter assembly is \(\$ 10(\$ 1,500,000 \div 150,000)\). Further analysis of manufacturing overhead revealed the following information. \(0 f\) the total manufacturing overhead, only \(25 \%\) is considered variable. \(0 f\) the fixed portion, \(\$ 300,000\) is an allocation of general overhead that will remain unchanged for the company as a whole if production of the starter assemblies is discontinued. A further \(\$ 200,000\) of the fixed overhead is avoidable if production of the starter assemblies is discontinued. The balance of the current fixed overhead, \(\$ 100,000,\) is the division manager's salary. If Denver Engineering discontinues production of the starter assemblies, the manager of Division 3 will be transferred to Division 2 at the same salary. This move will allow the company to save the \(\$ 80,000\) salary that would otherwise be paid to attract an outsider to this position. 1\. Tutwiler Electronics, a reliable supplier, has offered to supply starter- assembly units at \(\$ 8\) per unit. Because this price is less than the current average cost of \(\$ 10\) per unit, the vice president of manufacturing is eager to accept this offer. 0 n the basis of financial considerations alone, should Denver Engineering accept the outside offer? Show your calculations. (Hint: Production output in the coming year may be different from production output in the past year.) 2\. How, if at all, would your response to requirement 1 change if the company could use the vacated plant space for storage and, in so doing, avoid \(\$ 100,000\) of outside storage charges currently incurred? Why is this information relevant or irrelevant?
See all solutions

Recommended explanations on Math Textbooks

Geometry

Read Explanation

Logic and Functions

Read Explanation

Discrete Mathematics

Read Explanation

Calculus

Read Explanation

Decision Maths

Read Explanation

Probability and Statistics

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.