Question

considering what we have learned in chapter 7 about product-planning decision, consider an invitation to a party you received as a special order. Using managerial accounting language, how do you decide if you should go to the party (a special order) ?

Answer 1

A special order could only be taken or accepted if there is excess capacity (such as excess machine hours or labor hours or plant performance) within the business operation.

Once there is surety of excess capacity, the firm can take the special order if the following things are happened:

No.1) the price of special order must cover the aggregate of all traceable costs, since these are avoidable and therefore relevant. Examples of traceable costs are direct material cost, direct labor cost, variable cost, and the portion of fixed cost that is avoidable. Unavoidable costs, such as allocated fixed overhead, should not be considered here since this is irrelevant (although there is no special order, such cost still arises).   

No.2) the price of special order may be lower than the normal order but it still can add incremental profit, since unavoidable costs are eliminated. If such thing happened the special order should be accepted.