Special Order Decisions Chapter 20 Managerial Accounting Special Order Decisions Prepared by Diane Tanner University of North Florida Copyright ©2015. University of North Florida. All rights reserved.

Special Order Decisions 2 Special Order Decisions One of several short-term management decisions Involves determining whether a ‘special’ order from a customer should be accepted Usually for a lower selling price Variable costs will be incurred Dependent upon capacity Capacity must be available to accept, or opportunity costs become a big issue

Special Order Incremental Amounts 3 Special Order Incremental Amounts Incremental Revenue The additional revenues generated from accepting the special order Incremental Costs The additional costs incurred from accepting the special order  Not relevant Sunk costs Any costs incurred before the special order was accepted 

How to Make Special Order Decisions 4 How to Make Special Order Decisions If incremental revenues < incremental costs Reject the order, unless qualitative characteristics impact the decision If incremental revenues > incremental costs Accept the order unless qualitative characteristics impact the decision If incremental revenues = incremental costs Use qualitative characteristics to assess

Qualitative Considerations 5 Qualitative Considerations Will existing customers have issues? Will employees work the extra hours? Will new customers expect the same lower prices? Quantitative factors The revenues and costs Qualitative factors Customer goodwill Existing customers Employee work schedules Materials availability

Special Order Example Incremental revenue ($9.75 x 800) $ 7,800 Riser manufactures cell phone cases which it sells for $12 each to retail stores. Riser has received an order from a new customer who wants to buy 800 cases and is willing to pay $9.75 per case, provided Riser upgrades the resin quality. The resin differential is estimated to cost $0.60 per case. Riser has available capacity. The following unit cost data are based on a normal production of 7,200 cases produced each year: Direct materials $2.70 Direct labor 1.30 Factory overhead (70% variable) 4.40 Incremental revenue ($9.75 x 800) $ 7,800 Incremental costs: Direct materials [($2.70 + $0.60) x 800] (2,640) Direct labor ($1.30 x 800) (1,040) Variable overhead ($4.40 x 70% x 800) (2,464) Incremental increase in profit if order accepted $ 1,656

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