Question

What is a special order? What factors does a company consider when examining a special order? TTT Arial 3 (12pt) T e is Path: Words o

Answer 1

Special Order

Special Order is an order from customer generally involving huge quantity at a low price. These type of order may not be regular. By accepting these type of orders, one can make profit or end up with loss based on the relevant costs of the special order.

Factors to be considered while accepting a special order

1. Excess Capacity: Before accepting a special order, the firm shall ensure whether it has excess enough capacity to produce a special order. Otherwise, additional fixed costs may be incurred which is not feasible.

2. Relevant Costs: All the relevant costs (Variable costs) and income related to the special order must by analyzed. For example, if the order doesn't result in any additional fixed costs then the firm may accept the order and utilize the contribution from order to recover existing fixed costs and earn additional profit.

3. Ability to perform: Sufficient manpower and ability to perform the special order shall be ensured.