1. 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.

2. Special Order Decisions2
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

3. Special Order Incremental Amounts3
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 

4. How to Make Special Order Decisions4
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

5. Qualitative Considerations5
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

6. 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 [($ $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

7. The End