Special Order Decisions 012-4 Prepare an analysis showing whether a special orde

Question

Special Order Decisions 012-4 Prepare an analysis showing whether a special order should be accepted Managers must often evaluate whether a special order should be accepted, and if the order is accepted, the price that should be charged. A special orderis a one-time order that is not considered part of the company's normal ongoing business. To illustrate, Mountain Goat Cycles has just received a request from the Seattle Police Department to produce 100 specially modified mountain bikes at a price of $558 each. The bikes would be used to patrol some of the more densely populated residential sections of the city. Mountain Goat Cycles can easily modify its City Cruiser model to fit the specifications of the Seattle Police. The normal selling price of the City Cruiser bike is $698, and its unit product cost is $564 as shown below: Direct materials$372 Direct labor Manufacturing overhead 102 Unit product cost 90 $564 The variable portion of the above manufacturing overhead is $12 per unit. The order would have no effect on the company's total fixed manufacturing overhead costs

Explanation / Answer

Special order can be accepted if :-

1. it has more revenue than cost

2. it does not affect production of normal units required for regular order

3. if sale price per unit in special order is lower than regular sale price, if it does not require to cut normal sales price.

In above example, revenue of $ 558 is more than cost of $ 504 per unit.

Also it is mentioned that it does not have any adverse affect on its regular schedule production and this order will not have any affect on its regular sales.

Hence it is apt in the given case to accept the special order. Similar care should be taken to analyse each situation of special order.

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