1. Special Order Decisions
Suppose a one-off order is received, but at a lower price than usual.
Intuitively we should reject this offer BUT suppose F.C./ indirect costs have already been met by existing sales. To add to profit, in this case we would only have to cover direct costs.
e.g. VC=£7 FC=£300 (remain so up to and including output=200) P=£10
BE pt= Fixed costs = 300 = 100
Cont per unit (10-7)
Therefore if the firm was selling 120 units, should it accept an order for another 40 at £9?
It will increase profit and there is spare capacity BUT these aren’t the only factors:
Financial considerations:
Extra contribution.
Lost profit from other sales.
Impact on F.C.
Future sales may be at a lower price.
Non-Financial considerations:
Utilisation of capacity.
Impact on existing customers.
Penetration of new markets?
Extra publicity.