Question

feedback on Special orders, I would also like to add couple other important issue to consider on special order:

1. Pricing special orders

a. If price exceeds the incremental costs, the sale should be made.

b. Opportunity costs may be relevant if regular sales have to be foregone to fulfill the special order.

2. The foregone contribution margin on the regular sales given up.  

Your thoughts?

Answer 1

Feedback on special orders,

Special orders are those which require additional cost to be incurred because it is not in the regular course and it requires some additional work to be done, and it also requires some of the regular production to be foregone. Follow the below feedback.

1. The special order should only be accepted if incremental cost is more than the price, we should consider only the incremental cost because, regular cost is what we however incur, even if the order is not accepted. If the price is less than incremental cost, it will be loss to the company accepting the order.
2. Opportunity cost is what, as the name itself says, the income that is foregone on regular sales by accepting special order. It is always necessary to consider opportunity cost while quoting price for special orders, because we should recover what we loose by accepting special order, from the special order itself.
3. Contribution foregone don't make a sense while quoting the price, because special orders would only be accepted if their contribution margin is more than that of regular sales. It only gains important while calculating the overall profit where we reduce the contribution foregone on regular sales.