Accounting 2301 Chapter 14: Special Orders Analysis
Introduction
Special Orders: One-time requests or orders at different prices.
Example: Customer requests a one-time order at a different price or requests an alteration at the same price.
Decision: Whether to accept or reject the special order.
Assumptions in Analyzing Special Orders
Market Impact: Sales in other markets remain unaffected by the special order.
Capacity: There is sufficient production capacity to fill the order without affecting existing commitments.
Example: Cannot accept a special order if it means exceeding production capacity or turning down existing customers.
Example Analysis: Sunbelt Company
Production: 100,000 smoothie blenders per month (80% capacity).
Costs:
Variable manufacturing costs: $8 per unit.
Fixed costs: $400,000 total ($4 per unit).
Normal selling price: $20 per blender.
Special Order Offer:
Kensington Company offers to buy 2,000 blenders at $11 per unit.
No impact on normal sales.
Existing capacity can accommodate the additional production.
Incremental Analysis
Revenues:
Rejecting the order: $0 additional revenue.
Accepting the order: Additional $22,000 (2,000 units x $11 each).
Costs:
Variable Costs: Only the variable costs are considered in incremental analysis.
Rejecting the order: $0 additional costs.
Accepting the order: Additional $16,000 (2,000 units x $8 variable cost per unit).
Fixed Costs:
Not relevant as they remain unchanged regardless of production level.
Decision
Net Income Impact:
Additional revenue ($22,000) minus additional variable costs ($16,000) yields an additional net income of $6,000.
Major Consideration: Variable costs vs. fixed costs.
General Rule: Accept orders where the selling price exceeds variable costs per unit, as done in this case.
Conclusion
Special orders can contribute positively to net income if analyzed correctly, focusing on variable costs and ignoring fixed costs in the decision-making process.