Question

True or false, managers should except special orders provided the special order price exceeds the product cost per unit under absorption costing.

please explain why it is either true or false

Answer 1

False

.

Special order are accepted on the basis of Unit cost under variable costing. The term used is relevant cost which include total cost of production under variable costing and any other specific additional cost due to order.

Absorption costing cost per unit is more than variable costing cost per unit because absorption costing also includes fixed manufacturing overhead in product cost. In deciding whether to accept a special order or not we only consider incremental cost of product that is Variable or any other cost that would be needed to complete the order (such as special logo asked by buyer). Fixed cost is not considered because fixed cost do not change whether we accept order or not.

Another thing to consider in a special order is that the company has sufficient capacity to fulfill order. If the company has not enough capacity then accepting offer may result in loosing regular sales. In this case the the special order price must be equal to regular sales price.