What is a special order?

A special order is a one-off request to supply goods below the normal selling price. Acceptance is usually confined to cases where spare capacity exists.

A product sells at £12 with variable costs of £7 per unit. A customer offers £9 per unit for 2,000 units. Calculate the contribution from the order.

Contribution per unit equals the offered price of £9 less the variable cost of £7. Contribution per unit is therefore £2. Across 2,000 units the total contribution is £4,000.

On what conditions should that special order be accepted?

The order should be accepted where spare capacity exists and fixed costs are already covered by normal sales, since the £4,000 contribution is additional profit. Accepting is unwise if existing customers learn of the lower price or if capacity is needed for full-price work.

Why does a special order only need to cover its variable costs to be worth accepting?

If the business has spare capacity, its fixed costs are already being paid by normal sales. Any price above variable cost gives a positive contribution, which adds directly to profit.

How is the contribution from a special order calculated?

Contribution per unit = price offered − variable cost per unit. Total contribution = contribution per unit × number of units ordered.

A firm sells a product at £20 with variable costs of £11 per unit. A customer offers £13 per unit for 500 units, and the firm has spare capacity. Should it accept on financial grounds?

Contribution per unit = £13 − £11 = £2, so the order adds 500 × £2 = £1,000 to profit. On financial grounds it should accept.

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Decision-Making and Investment Appraisal

Special orders

1 thing to know
Component 2

Overview

What a special order is, calculating its contribution, when accepting it adds to profit and when it does not because capacity is full or extra fixed costs arise, and the non-financial factors to weigh.

What you need to know

Answer each one before you reveal it.

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Key term

When should a special order earning a £4,000 contribution be accepted?

Questions from this subtopic

Each one with the model answer underneath.

1
What is a special order?
Model answer
A special order is a one-off request to supply goods below the normal selling price. Acceptance is usually confined to cases where spare capacity exists.
2
A product sells at £12 with variable costs of £7 per unit. A customer offers £9 per unit for 2,000 units. Calculate the contribution from the order.
Model answer
Contribution per unit equals the offered price of £9 less the variable cost of £7. Contribution per unit is therefore £2. Across 2,000 units the total contribution is £4,000.
3
On what conditions should that special order be accepted?
Model answer
The order should be accepted where spare capacity exists and fixed costs are already covered by normal sales, since the £4,000 contribution is additional profit. Accepting is unwise if existing customers learn of the lower price or if capacity is needed for full-price work.
4
Why does a special order only need to cover its variable costs to be worth accepting?
Model answer
If the business has spare capacity, its fixed costs are already being paid by normal sales. Any price above variable cost gives a positive contribution, which adds directly to profit.
5
How is the contribution from a special order calculated?
Model answer
Contribution per unit = price offered − variable cost per unit. Total contribution = contribution per unit × number of units ordered.
6
A firm sells a product at £20 with variable costs of £11 per unit. A customer offers £13 per unit for 500 units, and the firm has spare capacity. Should it accept on financial grounds?
Model answer
Contribution per unit = £13 − £11 = £2, so the order adds 500 × £2 = £1,000 to profit. On financial grounds it should accept.

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