Special Order Decisions

A special-order decision focuses on whether a specially priced order should be accepted or rejected. The "special" price is always lower than normal and is an example of a tactical decision with a short-term focus. Companies must ensure that acceptance of special orders does not jeopardize normal distribution channels or adversely affect other strategic elements. If this qualification is met, special orders often can be attractive, especially when the firm has unused capacity. For this situation, the company can focus its analysis on resources acquired as needed- because this will be the source of any increase in resource spending attributable to the order.

Example: Ellis Company makes boxed stationery and has capacity for 100,000 boxes. Currently, Ellis is producing 80,000 boxes. Information on price and costs is as follows:

Round intermediate calculations to the nearest cent. Use rounded answers in subsequent computations, if required.

Price	$2.40
Direct materials	$0.83
Direct labor	0.70
Variable overhead	0.17
Fixed overhead*	1.18
*Fixed overhead is based on capacity of 100,000 boxes.

A gift store chain recently came to Ellis Company and asked to have 12,900 boxes of stationery printed at a price of $1.85 per box. If Ellis Company accepts the special order, operating income will be $ - Select your answer -higherlowerItem 2 .

Now suppose that the gift store chain requires that a special imprinted seal must be put on each box. Direct materials will increase by $0.07 per box and Ellis can rent the machinery to imprint the seals for $1,439. If Ellis Company accepts the special order with this new requirement, operating income will be $ - Select your answer -higherlowerItem 4 .