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Knorr’s Knob Company produces 5,000 doorknobs a month, which is 90% of factory capacity. Variable manufacturing...

Knorr’s Knob Company produces 5,000 doorknobs a month, which is 90% of factory capacity. Variable manufacturing costs are $4 per unit. Fixed manufacturing costs are $10,000 per month. Knobs are usually sold for $20 apiece. Ms. Knorr has just received a special order from Uganda Home Supplies to produce an extra 500 knobs for $2,200. Should Knorr accept the order? Discuss all important assumptions/criteria which must be considered in a decision like this (make a fully developed argument/recommendation).

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Answer #1

Special Order Pricing decision involves a situation in which a firm has one-tome opportunity to accept or reject a special oredr for a specified quantity of its product or service.

As above situation:

Cost to produce a unit= $4.00

Special order price offered per unit is 2200/500= $4.40

Contribution to income per unit= $0.40 ($4.40- $4.00) or $200 (0.40 x 500 knobs)

As $4.40 is greater than cost i.e. $4.00, so Knorr should accept the order.

We have not considered fixed cost because it is fixed in nature and is ir-relevant for decision making as it will continue to occur rather we produce goods or not.

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