Special orders

Question 1

What is a special order ?

Answer 1

One off order requested specifically by a customer

Question 2

Who typically places a special order and what may it be ?

Answer 2

Large order placed by retail businesses

Question 3

What is a key issue with special orders ?

Answer 3

Whether costs of production will be covered by the amount to be paid = decided by cost per unit customer is willing to pay

Question 4

What 3 factors decide whether to accept a special order ?

Answer 4

1. Whether order increases business’s variable costs
2. Whether company can resell products
3. Whether order may lead to future sales

Question 5

How does a business look at whether costs of production for a special order are worthwhile ?

Answer 5

Contribution

Question 6

What is contribution ?

Answer 6

Surplus made on each product sold by a business, & shows how many products need to be sold to cover fixed operating costs

Question 7

What is the calculation for contribution ?

Answer 7

Selling price - variable costs per unit

Question 8

What is the calculation for breakeven ?

Answer 8

Fixed costs / contribution per unit

Question 9

What are 4 non-financial factors a business must consider before making a special order ?

Answer 9

1. Will order lead to future sales & make positive contribution
2. Is the order the best way to use any spare capacity or does it interfere with long term plans
3. Will lower selling price have knock on effect on other customers who want lower price for their orders
4. Are there any alternative contracts that are more profitable

Question 10

What financial factor must a business consider before making a special order ?

Answer 10

Whether the lower order price generates a healthy profit