Principles of Managerial Accounting · free preview
Evaluating Whether to Accept a Special Order
A special order is worth accepting when its price covers the incremental costs of filling it, which depends on whether idle capacity exists and whether regular sales or prices will be affected.
1. The incremental question
The incremental question
2. The idle capacity case
The idle capacity case
3. The constraint case
The constraint case
4. The market effect case
The market effect case
5. Decision rule
What is the correct decision rule for a special order?
6. Idle capacity case
An order for 5,000 units at 28 dollars arrives against a variable cost of 25 dollars, with idle capacity. Compute the incremental gain or loss from accepting.
7. Opportunity cost entry
The special order would displace 4,000 regular units contributing 20 dollars each. Compute the opportunity cost.
8. Net effect with constraint
The order's incremental gain is 15,000 dollars and the opportunity cost is 80,000 dollars. Compute the net effect of accepting.
9. Below-list term
A one-time order at a price below the regular list is called a ____ order. One word.
10. Fixed overhead relevance
Allocated fixed overhead is usually ____ to a special order decision when idle capacity exists. One word.
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