Decision Making - Special Orders

Question 1

Should a firm fulfill special orders when excess capacity exists?

Answer 1

When a manufacturer has excess production capacity, there is no opportunity cost involved when accepting a special order

The company should accept the order if the minimum price for the product = to the variable costs

Question 2

Should a firm fulfill special orders when there is NO excess capacity?

Answer 2

When a manufacturer lacks excess production capacity, the differential (marginal or incremental) costs of accepting the order must be considered

Besides the variable costs of the production run, the firm must consider the opportunity cost of redirecting productive capacity away from (possible more profitable) products