Special Order Decisions

Learning Outcomes

  • Create a report outlining the data to support a special order decision

Let’s return to relevant revenues and costs, with a Hupana Running Company special order. They are a company facing a special order for fuchsia high tops. Here is a run-down of the special order:

Special Order: Fuchsia High Tops
Revenue (50 pair @ $150 each) $7,500
Material: Fuchsia (50 × 7 units x $3.5 per unit) $1,225
Direct Labor (50 × .8 × $30) $1,200
Variable overhead (30 hours × $3 per hour) $90
Total variable expenses $2,515
Fixed Expense
Dye for material cutter $1,200
Total Expenses for Special Order $3,775
Incremental net operating income $3,725

Since a special order is a one-time order, that is not part of a company’s regular business operation. Effective analysis needs to be done to insure that a special order will bring additional revenue to a company and not use space or time that would have been better used for the regular product lines.

As a manager, it may be your responsibility to figure out if a special order should be taken, and if so, you will need to calculate how much should be charged for the order. You will also need to make sure that you have the time available in your production schedule to handle the extra work. Creating a report outlining the data to support a special order decision, like the one above, will help you make those important decisions.

In Hupana Running Company’s case, the revenue for the special order high-tops is sufficient to cover the additional costs incurred to make them. They need to make sure to account for things like special equipment or materials that might increase the costs.

Hupana needs to pay overtime to complete this order, but still made a nice profit on this special order. There may be additional things to consider from the qualitative standpoint. In other words, it isn’t always about the money! Perhaps the exposure will bring additional sales of the regular line of shoes, or other teams may want to order shoes.

Practice Questions