special orders Flashcards
what is a special order ?
special orders differ from what a business normally offers
customers may ask for products with ?
- a much shorter lead time than normal
- a much reduced price
- a far higher volume
- for an existing product to be modified in some way and for a higher selling price to be received
how can a special order impact a business ?
places pressure upon the firm to decide whether they should accept the additional order to keep the customer happy and potentially build a new customer relationship or reject it and risk damage to their reputation
what are the considerations of special orders ?
both the quantitative and qualitative factors behind a decision as to whether or not accept the order
what impact will special orders have upon the business ?
a financial impact
key questions for special orders might include ?
- will this harm our liquidity position ?
- how much of a discount can we afford to offer
- will we need extra staff or do we have the spare capacity to cope ?
- how might this order affect our existing customers and their orders ?
- is this likely to be a ‘one-off’ order or might it lead to a new customer relationship with more profitable orders in the future ?
how will a business decide to accept or reject an order ?
the starting point is the calculation of contribution
what does contribution calculate ?
the amount that each item sold will contribute towards the fixed costs of the business and subsequently towards profits once these have been covered
calculation : contribution per unit =
selling price - variable cost per unit
calculation : total contribution =
contribution per unit x units sold
calculation : profit =
total contribution - fixed costs
qualitative factors ?
impact on staff
capacity
impact on customers
product adjustment
benefits of special orders :
- further profitable orders might arise from the special order
- it allows the business to make se of their spare capacity
- potential access to new markets
- worker motivation might rise as they feel increased job security
negatives of special orders :
- it can place massive strain upon the capacity and resources of a business
- the quality of products might suffer as the focus shifts to quantity
- existing customers might feel under valued and switch to competitors
- might lead to pressure for a permanent price cut and therefore less profits
