Question

You are a manager at a major manufacturing company. Provide adequate information to the Controller of your company, so that they can make a decision for one of the following situations: 1.Accept an order at a special price 2.Make or buy component parts or finished products 3.Sell or process further them further 4.Repair, retain, or replace equipment 5.Eliminate an unprofitable business segment or product

Answer 1

Accept an order at a special price:

The following information is needed in decision making whether to accept an order at a special price or not

· Variable manufacturing costs – Direct material, direct labor and variable manufacturing overheads – Existing and any increase expected due to the order

· Variable selling or shipping expenses if any incurred for the special order

· Any incremental cost incurred for special order. For example: cost of dies, moulds, tools, etc which has no value after special order sales

If there is incremental profit (Special order sales value – Incremental variable costs and specific cost) from special order the order is accepted else it is rejected.

Fixed cost is not relevant for evaluation of the special order since it is sunk cost and not relevant in decision making.