special orders

Question 1

what is special orders

Answer 1

differ from what a bussiness normally offers
for example may ask for

• shorter lead time than normal
• reduced price
• much higher volume
• modification in existing product - higher selling price

businesses must make decision if they want to accept the order to make potentually new customer relationship or reject and risk loosing customer or damaging reputation

Question 2

what needs to be considered

Answer 2

• harm liquidity position
• hoe much of a discount can be afforded
• is it likely to be one off or will it lead to new customers and more of these profiable orders
• will this effect existing customers
• will extra resources/ staff be neccisary
• do we have the spare capacity to cope

Question 3

contribution formula

Answer 3

• contribution = amount that each item sold will contribute tiwards the fixed costs of a business and towards profits once costs have been covered

contribution per unit = selling price- variable cost per unit

total contribution = contribution per unit X units sold

profit= total contribution- fixed costs

Question 4

example answer

Answer 4

Purely on financial grounds, the special order should be rejected as it will lower profits for the business by £2,150. However, is this likely to be a one-off order or could W&B Ltd look to secure a permanent deal with the entrepreneur who has lost their regular supplier. How will the staff feel about the extra work and can they afford the extra machine if the customer decides to take their business elsewhere in the future?

On balance the decision is a difficult one. If they accept the order then an extra £105 profit is made but this means that they lose all of their regular customers for this week.

These customers might switch to competitors and therefore the long term profits of the business might be endangered.

However, this gives the entrepreneur the chance to operate at maximum capacity and possibly diversify the business idea into new lucrative markets.

Question 5

qual factors

Answer 5

• impat on staff- extra hours, extra training, higer labour costs, impact their motivation
• capacity - do they have spare capscity, will need additional facilities, increased costs
• impact on customers - may negatovely impact existing customers/ loyal, existing customers then may demand a lower price
• product ajustment - require modifications, do they have the abilities to change, and how much will it cost

Question 6

eval

Answer 6

adv:
- may recieve further profitable orders
- allows business to make use of spare capacity
- could access new markets
- increase motivation increased job security

dis-
- could strain capacity and resources
- the quality may suffer if focus shifits to quantity
- existing customers may feel undervalued
- might lead to pressure for a pearmanent price cut and therefore less profits from existing customers

It depends upon the type of business and their circumstances.
Consider short and long-term implications of a special order.
Does the business already have liquidity concerns?
Is the special order likely to lead to a long-term order?
Does it provide the means to diversify the business?
Do the firm have spare capacity?
Are the business able to utilise their resources more effectively if an extra order occurs?
Impact on their existing customers?
Impact on stakeholders e.g. staff and local community
To say never is unrealistic. Much depends on the objectives of the business.