{"id":213,"date":"2021-01-26T22:25:36","date_gmt":"2021-01-26T22:25:36","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=213"},"modified":"2021-06-08T22:25:56","modified_gmt":"2021-06-08T22:25:56","slug":"special-pricing-issues","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/chapter\/special-pricing-issues\/","title":{"raw":"Special Pricing Issues","rendered":"Special Pricing Issues"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Use differential analysis in decision-making<\/li>\r\n<\/ul>\r\n<\/div>\r\nDuring your career, you will run into a variety of special pricing issues. For example, sometimes management has an opportunity to sell its product in two or more markets at two or more different prices. Businesses like airlines and movie theaters, for example, sell tickets at discount prices to particular groups of people\u2014children, students, and senior citizens, first-class, coach, economy.\r\n\r\nGood business management requires keeping the cost of idleness at a minimum. When operating at less than full capacity, management should seek additional business. Management may decide to accept such additional business at prices lower than average unit costs if the differential revenues from the additional business exceed the differential costs. By accepting special orders at a discount, businesses can keep people employed that they would otherwise lay off.\r\n\r\nIn this example, you\u2019ll use differential analysis to determine whether a company should sell its products at prices below regular levels.\r\n\r\nAssume Rios Company produces and sells a single product with a variable cost of $8 per unit. Annual capacity is 10,000 units, and annual fixed costs total $48,000. The selling price is $20 per unit and production and sales are budgeted at 5,000 units. Thus, budgeted income before income taxes is $12,000, as shown below.\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>Rios Company\r\nIncome Statement\r\nFor the period ending May 31<\/caption>\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount 1<\/th>\r\n<th scope=\"col\">Amount 2<\/th>\r\n<th scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Revenue (5,000 units at $20)<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$ 100,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"4\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Variable costs:<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct materials cost ($4 per unit)<\/td>\r\n<td class=\"r\">$20,000<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Labor ($1 per unit)<\/td>\r\n<td class=\"r\">5,000<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Overhead ($2 per unit)<\/td>\r\n<td class=\"r\">10,000<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Marketing and administrative costs ($1 per unit)<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 5,000<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Total variable costs ($8 per unit)<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$40,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"4\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Fixed costs:<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Overhead<\/td>\r\n<td class=\"r\">$28,000<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Marketing and administrative costs<\/td>\r\n<td class=\"r\">20,000<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Total fixed costs<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 48,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Total costs ($17.60 per unit)<\/td>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 88,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net income<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a012,000<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nAssume the company receives an order from a foreign distributor for 3,000 units at $10 per unit. This $10 price is not only half of the regular selling price per unit, but also less than the $17.60 average cost per unit ($88,000\/5,000 units). However, the $10 price offered exceeds the variable cost per unit by $2. If the company accepts the order, net income increases to $18,000.\r\n\r\nRevenue would increase to $130,000 with the special order. Each of the variable costs increases in total by 60% because total volume increases by 60% (3,000 units in the special order\/5,000 units regularly produced). The revised income statement would appear as follows:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\"><caption>Rios Company\r\nIncome Statement (incl. special order)\r\nFor the period ending May 31<\/caption>\r\n<thead>\r\n<tr class=\"u-sr-only\">\r\n<th scope=\"col\">Description<\/th>\r\n<th scope=\"col\">Amount 1<\/th>\r\n<th scope=\"col\">Amount 2<\/th>\r\n<th scope=\"col\">Total<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td>Revenue (5,000 units at $20 + 3,000 units at $10)<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r\">$ 130,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"4\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Variable costs:<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct materials cost ($4 per unit)<\/td>\r\n<td class=\"r\">$32,000<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Labor ($1 per unit)<\/td>\r\n<td class=\"r\">8,000<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Overhead ($2 per unit)<\/td>\r\n<td class=\"r\">16,000<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Marketing and administrative costs ($1 per unit)<\/td>\r\n<td class=\"r\">\u00a0 \u00a0 8,000<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Total variable costs ($8 per unit)<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$64,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"4\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Fixed costs:<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Overhead<\/td>\r\n<td class=\"r\">$28,000<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Marketing and administrative costs<\/td>\r\n<td class=\"r\">20,000<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Total fixed costs<\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 48,000<\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Total costs ($14.00 per unit)<\/td>\r\n<td><\/td>\r\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 112,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net income<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a018,000<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\n&nbsp;\r\n\r\nNote that the fixed costs do not increase with the special order. Because the special order does not increase the fixed costs, the special order\u2019s revenues need only cover its variable costs.\r\n\r\nIf Rios Company continues to operate at 50% capacity (producing 5,000 units without the special order) it would generate income of only $12,000. By accepting the special order, net income increases by $6,000 ($18,000 net income with special order \u2013 $12,000 net income without special order).\r\n\r\nA differential analysis would look like this:\r\n<div align=\"left\">\r\n<table class=\"fin-table acctstatement fw\">\r\n<tbody>\r\n<tr>\r\n<th class=\"r\" scope=\"col\"><\/th>\r\n<th class=\"r\" scope=\"col\">Accept<\/th>\r\n<th class=\"r\" scope=\"col\">Reject<\/th>\r\n<th class=\"r\" scope=\"col\">Difference<\/th>\r\n<\/tr>\r\n<\/tbody>\r\n<tbody>\r\n<tr>\r\n<td>Revenues<\/td>\r\n<td class=\"r\">$ \u00a0 130,000<\/td>\r\n<td class=\"r\">$ \u00a0 100,000<\/td>\r\n<td class=\"r\">$ \u00a0 \u00a0 30,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Costs<\/td>\r\n<td class=\"r\">$ \u00a0 112,000<\/td>\r\n<td class=\"r\">$ \u00a0 \u00a088,000<\/td>\r\n<td class=\"r\">$ \u00a0 \u00a0 24,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Net advantage (disadvantage)<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a0 \u00a06,000<span class=\"u-sr-only\">Double line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n&nbsp;\r\n\r\n<\/div>\r\nVariable costs set a floor for the selling price in special-order situations. Even if the price exceeds variable costs only slightly, the additional business increases net income, assuming fixed costs do not change. However, pricing just above variable costs of special-order business often brings only short-term increases in net income. In the long run, companies must cover all of their costs, not just the variable costs.\r\n\r\nHere is a comprehensive example of a special pricing decision:\r\n\r\n[embed]https:\/\/youtu.be\/0vDqSCMXoa0[\/embed]\r\n\r\nYou can view the <a href=\"https:\/\/oerfiles.s3-us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/ManagementProductAndPricingDecisions_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for \"Management Product &amp; Pricing Decisions: Special Order; Incremental Analysis - Accounting video\" here (opens in new window)<\/a>.\r\n\r\nNow, check your understanding of special pricing issues.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]220622[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Use differential analysis in decision-making<\/li>\n<\/ul>\n<\/div>\n<p>During your career, you will run into a variety of special pricing issues. For example, sometimes management has an opportunity to sell its product in two or more markets at two or more different prices. Businesses like airlines and movie theaters, for example, sell tickets at discount prices to particular groups of people\u2014children, students, and senior citizens, first-class, coach, economy.<\/p>\n<p>Good business management requires keeping the cost of idleness at a minimum. When operating at less than full capacity, management should seek additional business. Management may decide to accept such additional business at prices lower than average unit costs if the differential revenues from the additional business exceed the differential costs. By accepting special orders at a discount, businesses can keep people employed that they would otherwise lay off.<\/p>\n<p>In this example, you\u2019ll use differential analysis to determine whether a company should sell its products at prices below regular levels.<\/p>\n<p>Assume Rios Company produces and sells a single product with a variable cost of $8 per unit. Annual capacity is 10,000 units, and annual fixed costs total $48,000. The selling price is $20 per unit and production and sales are budgeted at 5,000 units. Thus, budgeted income before income taxes is $12,000, as shown below.<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>Rios Company<br \/>\nIncome Statement<br \/>\nFor the period ending May 31<\/caption>\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount 1<\/th>\n<th scope=\"col\">Amount 2<\/th>\n<th scope=\"col\">Total<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Revenue (5,000 units at $20)<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$ 100,000<\/td>\n<\/tr>\n<tr>\n<td colspan=\"4\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Variable costs:<\/strong><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct materials cost ($4 per unit)<\/td>\n<td class=\"r\">$20,000<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Labor ($1 per unit)<\/td>\n<td class=\"r\">5,000<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Overhead ($2 per unit)<\/td>\n<td class=\"r\">10,000<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Marketing and administrative costs ($1 per unit)<\/td>\n<td class=\"r\">\u00a0 \u00a0 5,000<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Total variable costs ($8 per unit)<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$40,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td colspan=\"4\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Fixed costs:<\/strong><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Overhead<\/td>\n<td class=\"r\">$28,000<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Marketing and administrative costs<\/td>\n<td class=\"r\">20,000<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Total fixed costs<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 48,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Total costs ($17.60 per unit)<\/td>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 88,000<\/td>\n<\/tr>\n<tr>\n<td>Net income<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a012,000<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>Assume the company receives an order from a foreign distributor for 3,000 units at $10 per unit. This $10 price is not only half of the regular selling price per unit, but also less than the $17.60 average cost per unit ($88,000\/5,000 units). However, the $10 price offered exceeds the variable cost per unit by $2. If the company accepts the order, net income increases to $18,000.<\/p>\n<p>Revenue would increase to $130,000 with the special order. Each of the variable costs increases in total by 60% because total volume increases by 60% (3,000 units in the special order\/5,000 units regularly produced). The revised income statement would appear as follows:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<caption>Rios Company<br \/>\nIncome Statement (incl. special order)<br \/>\nFor the period ending May 31<\/caption>\n<thead>\n<tr class=\"u-sr-only\">\n<th scope=\"col\">Description<\/th>\n<th scope=\"col\">Amount 1<\/th>\n<th scope=\"col\">Amount 2<\/th>\n<th scope=\"col\">Total<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Revenue (5,000 units at $20 + 3,000 units at $10)<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r\">$ 130,000<\/td>\n<\/tr>\n<tr>\n<td colspan=\"4\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Variable costs:<\/strong><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Direct materials cost ($4 per unit)<\/td>\n<td class=\"r\">$32,000<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Labor ($1 per unit)<\/td>\n<td class=\"r\">8,000<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Overhead ($2 per unit)<\/td>\n<td class=\"r\">16,000<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Marketing and administrative costs ($1 per unit)<\/td>\n<td class=\"r\">\u00a0 \u00a0 8,000<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Total variable costs ($8 per unit)<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span>$64,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td colspan=\"4\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Fixed costs:<\/strong><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Overhead<\/td>\n<td class=\"r\">$28,000<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Marketing and administrative costs<\/td>\n<td class=\"r\">20,000<\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Total fixed costs<\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 48,000<\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Total costs ($14.00 per unit)<\/td>\n<td><\/td>\n<td class=\"r line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<td class=\"r\">\u00a0 \u00a0 \u00a0 \u00a0 112,000<\/td>\n<\/tr>\n<tr>\n<td>Net income<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a018,000<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>&nbsp;<\/p>\n<p>Note that the fixed costs do not increase with the special order. Because the special order does not increase the fixed costs, the special order\u2019s revenues need only cover its variable costs.<\/p>\n<p>If Rios Company continues to operate at 50% capacity (producing 5,000 units without the special order) it would generate income of only $12,000. By accepting the special order, net income increases by $6,000 ($18,000 net income with special order \u2013 $12,000 net income without special order).<\/p>\n<p>A differential analysis would look like this:<\/p>\n<div style=\"text-align: left;\">\n<table class=\"fin-table acctstatement fw\">\n<tbody>\n<tr>\n<th class=\"r\" scope=\"col\"><\/th>\n<th class=\"r\" scope=\"col\">Accept<\/th>\n<th class=\"r\" scope=\"col\">Reject<\/th>\n<th class=\"r\" scope=\"col\">Difference<\/th>\n<\/tr>\n<\/tbody>\n<tbody>\n<tr>\n<td>Revenues<\/td>\n<td class=\"r\">$ \u00a0 130,000<\/td>\n<td class=\"r\">$ \u00a0 100,000<\/td>\n<td class=\"r\">$ \u00a0 \u00a0 30,000<\/td>\n<\/tr>\n<tr>\n<td>Costs<\/td>\n<td class=\"r\">$ \u00a0 112,000<\/td>\n<td class=\"r\">$ \u00a0 \u00a088,000<\/td>\n<td class=\"r\">$ \u00a0 \u00a0 24,000<\/td>\n<\/tr>\n<tr>\n<td>Net advantage (disadvantage)<\/td>\n<td><\/td>\n<td><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$ \u00a0 \u00a0 \u00a06,000<span class=\"u-sr-only\">Double line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<\/div>\n<p>Variable costs set a floor for the selling price in special-order situations. Even if the price exceeds variable costs only slightly, the additional business increases net income, assuming fixed costs do not change. However, pricing just above variable costs of special-order business often brings only short-term increases in net income. In the long run, companies must cover all of their costs, not just the variable costs.<\/p>\n<p>Here is a comprehensive example of a special pricing decision:<\/p>\n<p><iframe loading=\"lazy\" id=\"oembed-1\" title=\"Management Product &amp; Pricing Decisions: Special Order; Incremental Analysis - Accounting video\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/0vDqSCMXoa0?feature=oembed&#38;rel=0\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>You can view the <a href=\"https:\/\/oerfiles.s3-us-west-2.amazonaws.com\/Managerial+Accounting\/Transcripts\/ManagementProductAndPricingDecisions_transcript.txt\" target=\"_blank\" rel=\"noopener\">transcript for &#8220;Management Product &amp; Pricing Decisions: Special Order; Incremental Analysis &#8211; Accounting video&#8221; here (opens in new window)<\/a>.<\/p>\n<p>Now, check your understanding of special pricing issues.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm220622\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=220622&theme=oea&iframe_resize_id=ohm220622\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-213\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Introduction to Relevant Information. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>Management Product &amp; Pricing Decisions: Special Order; Incremental Analysis - Accounting video. <strong>Authored by<\/strong>: Brian Routh TheAccountingDr.. <strong>Provided by<\/strong>: https:\/\/youtu.be\/0vDqSCMXoa0. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":11,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Introduction to Relevant Information\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"copyrighted_video\",\"description\":\"Management Product & Pricing Decisions: Special Order; Incremental Analysis - Accounting video\",\"author\":\"Brian Routh TheAccountingDr.\",\"organization\":\"https:\/\/youtu.be\/0vDqSCMXoa0\",\"url\":\"\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube License\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-213","chapter","type-chapter","status-publish","hentry"],"part":35,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/213","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/users\/364389"}],"version-history":[{"count":7,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/213\/revisions"}],"predecessor-version":[{"id":2125,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/213\/revisions\/2125"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/parts\/35"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/213\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/media?parent=213"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=213"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/contributor?post=213"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-managerialaccounting\/wp-json\/wp\/v2\/license?post=213"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}