55 7.7 Special Order Decisions
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Last updated
- Dec 28, 2020
Learning Objectives
- Use differential analysis for special order decisions.
Question: We have already learned that managers use differential analysis for make-or-buy decisions, product line decisions, and customer decisions. Differential analysis also provides a format that helps managers decide whether to accept special orders made by customers. What is a special order, and how can differential analysis be used to make a special order decision?
Special Order Considerations
Assume Tony’s T-shirts makes shirts for local soccer, baseball, basketball, and other sports teams. The owner, Tony, purchases the shirts and prints graphics on the shirts for each team. The graphics were designed several years ago, so design costs are no longer incurred. On average, Tony sells 1,000 shirts each month. Typical monthly financial data follow:
The monthly information provided relates to the company’s routine monthly operations. A representative of the local high school recently approached Tony to ask about a one-time special order. The high school will be hosting a statewide track and field event and is willing to pay Tony’s T-shirts $17 per shirt to make 200 custom T-shirts for the event. Because enough idle capacity exists to handle this order, it will not affect other sales. That is, Tony has the factory space and machinery available to produce more T-shirts.
Tony incurs the same variable costs of $13 per unit to produce the special order, and he will pay a firm $600 to design the graphics that will be printed on the shirts. This special order will have no other effect on Tony’s monthly fixed costs.
Question: Should Tony accept the special order?
Answer
Special Order Assumptions
Question: What assumptions were made with the differential analysis performed for Tony’s T-shirts?
- Computer Application
- Using Excel to Perform
- Once the format is established, the template can be used repeatedly for different scenarios.
- Formulas underlie all calculations, thereby minimizing the potential for math errors and speeding up the process.
- Changes can be made easily without having to redo the entire analysis.
An example of how to use Excel to perform differential analysis for the special order scenario presented in Figure 7.13 is shown here. Although many accounting courses do not require the use of computer spreadsheets, you are encouraged to use spreadsheet software like Excel when preparing homework or working review problems.
Key Takeaway
Managers often use differential analysis to decide whether to accept a special one-time order made by a customer. Managers compare sales revenue and costs for each alternative (accept or reject the special order), and select the alternative with the highest profit. Organizations must be careful to consider the long-run implications of reducing prices for special orders.
Review problem 7.6
The following monthly financial data are for Quicko’s, a company that makes photocopies for its customers. On average, Quicko’s makes 100,000 copies each month.
Quicko’s is approached by a local restaurant that would like to have 20,000 flyers copied. The restaurant asks Quicko’s to produce the flyers for 7 cents a copy rather than the standard price of 8 cents. Quicko’s can produce up to 130,000 copies a month, so the special order will not affect regular customer sales. Variable costs per copy will remain at 5 cents, but production of the restaurant flyers will require a special copy machine part that costs $250. This special order will have no other effect on monthly fixed costs.
- Using the differential analysis format presented in Figure 7.13, determine whether Quicko’s would be better off accepting or rejecting the special order.
- Summarize the result of accepting the special order using the format presented in Figure 7.14.
- Assume Quicko’s can only produce 100,000 copies per month, and that regular customer sales would decrease as a result of the special order. Using the differential analysis format presented in Figure 7.13, determine whether Quicko’s would be better off accepting or rejecting the special order.
- Answer
Definition
- A unique one-time order made by a customer.
