Special Order Decisions
Analysis determining whether to accept non-routine customer orders at prices different from standard rates, focusing on incremental costs and opportunity costs.
Special Order Decisions
Analysis determining whether to accept non-routine customer orders at prices different from standard rates, focusing on incremental costs and benefits rather than full costs, particularly when excess capacity exists.
For instance, a furniture manufacturer with idle capacity might receive a one-time request for 200 tables at $150 each—below the standard $200 price and $175 full cost. Analysis reveals incremental costs of only $120 per unit (materials, direct labor, variable overhead), indicating accepting the order would contribute $30 per unit ($6,000 total) toward fixed costs and profit.
Special order decisions exemplify contribution margin thinking, emphasizing that only costs and benefits that change with the decision should influence the outcome. Relevant costs typically include direct materials, direct labor, variable overhead, and any specific fixed costs incurred only if the order is accepted. Irrelevant costs (like existing fixed overhead) should be excluded unless affected by the decision. Beyond simple cost-price comparison, comprehensive analysis should consider capacity constraints, opportunity costs of resources, potential market disruption through price discrimination, precedent-setting concerns, and strategic implications for regular customer relationships. Special order opportunities arise most commonly during economic downturns, seasonal lulls, or in industries with high fixed costs and fluctuating demand.