12.1: Special Order Decisions
Learning Outcomes
- Create a report outlining the data to support a special order decision
In Module 11: Relevant Revenues and Costs, we went through a special order question with Hupana Running Company. Remember, they got a call to make those awesome fuchsia high tops? Here is a reminder:
| Special Order: Fuchsia High Tops | |
| Revenue (50 pair @ $150 each) | $7,500 |
| Expenses | |
| Material: Fuschia (50 × 7 units x $3.5 per unit) | $1,225 |
| Direct Labor (50 × .8 × $30) | $1,200 |
| Variable overhead (30 hours × $3 per hour) | $150 |
| Total variable expenses | $2,575 |
| Fixed Expense | |
| Dye for material cutter | $1,200 |
| Total Expenses for Special Order | $3,775 |
| Incremental net operating income | $3,725 |
So a special order is a one-time order, that is not part of a company’s regular business operation. Effective analysis needs to be done to insure that a special order will bring additional revenue to a company and not use space or time that would have been better used for the regular product lines. As a manager, it may be your responsibility to figure out if a special order should be taken, and if so, how much should be charged for the order.
In Hupana Running Company’s case, the revenue for the special order high-tops is sufficient to cover the additional costs incurred to make them. Make sure to account for things like special equipment or materials that might increase the costs. Also, make sure that you have the time available in your production schedule to handle the extra work.
Hupana needs to pay overtime to complete this order, but still made a nice profit on this special order. There may be additional things to consider from the qualitative standpoint (remember, it isn’t always about the money!). Perhaps the exposure will bring additional sales of the regular line of shoes, or other teams may want to order shoes!
Practice Questions