The Special Order

The Special Order

The special order problem considers the situation where an organization receives a one-time

offer to buy a product (good or service). The assumption is that accepting or rejecting this order

will have no future consequences other than the incremental cash flows created by the order. For

example, accepting a special order to supply a product for $40 that is sold to existing customers

for $50 may create problems with existing customers and expectations on the part of the new

customer that the special order price of $40 will consider. For this reason, many people believe

assumptions underlying the special order analysis are seldom met in practice.

The following is an example illustrating the special order analysis.

Brant Microwave manufactures a line of microwave ovens it sells with its own name and also

with various brand names for large retail chains.

There are 40 assembly workers and each is paid an annual salary of $70,000. Each worker

works approximately 1,650 hours per year. The resulting labour rate is, therefore, $42.42

($70,000 / 1,650) per hour. The number of assembly workers, which is the constraining factor of

production, cannot be increased.

Brant Microwave is currently operating at 90% of capacity (capacity is determined by available

labour hours) and is actively considering an offer from Steve’s Discount Warehouse. Steve has

offered to buy 10,000 microwaves and Brant Microwave has developed the following cost report

for this microwave:

Price per unit $80.00

Costs

Materials $50.00

Labour (.5 hours @ $42.42) 21.21

Fixed manufacturing overhead 15.00 86.21

Profit per unit -$6.21

There are two components of the fixed manufacturing overhead assigned to this product. There

is the regular fixed manufacturing overhead that is applied to all production at the rate of $20 per

labour hour and a cost to develop a mould that will be used to make the plastic cabinet for the

product. The mould cost would be $25,000, so...