Page 29 - Managerial Accounting-MGT 145
P. 29
Module 5: Differential Analysis
Special Order Decision Case
A special order is a unique one-time order made by a customer.
Differential analysis provides a format that helps managers
decide whether to ACCEPT or REJECT special orders.
When the company operates at less than its maximum capacity
and the company has enough capacity to produce and fill the
special order, the order should be ACCEPTED if the additional
sales exceed the additional variable costs.
When the company has no excess capacity, the cost to be
considered must include the lost contribution margin from
sacrificing regular sales to be able to fill up the special order.
Special Order With Excess Capacity Case 1.0
In a month, ABC Company normally produces and sells 8,000 units
of its product for P20. Variable manufacturing cost per unit is P10.
Total fixed manufacturing costs (up to max capacity 10,000 units)
is P38,000. Variable operating cost is P1 per unit and fixed
operating costs total P10,000.
A customer placed a special order for 1,500 units for P15 each. The
customer is willing to shoulder the delivery costs; hence the
business will not incur additional variable operating costs.
Should the company accept or reject the special order?
