What should you compare when deciding whether to accept a one-off special order?

What should you compare when deciding whether to accept a one-off special order?

• A. Total revenue of all orders and fixed costs.
• B. Incremental revenue versus incremental costs, and consider capacity and impact on existing orders.
• C. Only the price of the order.
• D. The company's entire annual budget.

Answer: (B)

When deciding on a one-off special order, use incremental analysis. Focus on the extra cash flows that would occur if you take the order: incremental revenue it would bring minus the incremental costs it would incur, not the business’s total revenue or fixed budget. This means looking at direct materials, direct labor, and any variable overhead tied to the order, plus any additional costs that arise specifically because of the order. Capacity matters. If you have spare capacity, any positive incremental contribution from the order adds to profit. If capacity is limited, you must compare this order’s contribution with the best alternative use of that capacity (the opportunity cost). Also assess the impact on existing orders—could accepting the special order delay, jeopardize delivery times, or affect service for current customers? If the incremental contribution is positive after considering these factors, the order should be accepted; otherwise it should be rejected.

When deciding on a one-off special order, use incremental analysis. Focus on the extra cash flows that would occur if you take the order: incremental revenue it would bring minus the incremental costs it would incur, not the business’s total revenue or fixed budget. This means looking at direct materials, direct labor, and any variable overhead tied to the order, plus any additional costs that arise specifically because of the order.

Capacity matters. If you have spare capacity, any positive incremental contribution from the order adds to profit. If capacity is limited, you must compare this order’s contribution with the best alternative use of that capacity (the opportunity cost). Also assess the impact on existing orders—could accepting the special order delay, jeopardize delivery times, or affect service for current customers?

If the incremental contribution is positive after considering these factors, the order should be accepted; otherwise it should be rejected.