Special Order

1. Say your company manufactures bath towels. Here are your results before youre approached about a special order.

Towel Company Before Special Order
Units Produced: 300,000	Per Unit	Total
Sales (revenue)	$12	$3,600,000
Fixed cost		-$1,000,000
Variable cost	$7	-$2,100,000
Profit		$500,000

A customer wants to place an order for 50,000 towels. The customer is willing to pay only $8 per towel. Assuming you have excess capacity, would it be profitable to accept the order?

Towel Company Special-Order Proposal
Units Produced: 50,000	Per Unit	Total
Sales (revenue)	$8	$400,000
Fixed cost		$0
Variable cost	$7	350,000
Profit		$50,000

Actually, the order is profitable. Because fixed costs were covered by your other production, theres no fixed cost related to this order. The variable costs per unit are the same ($7). At $8 per towel, the order generates a $50,000 profit. Think of anything above $7 as icing on the cake, because this is a sale that would not normally be part of your regular income stream.

Again, this order is a one-time deal. The 50,000 units in in the second table arent part of your normal production. Units in normal production incur fixed costs, and fixed costs are excluded from the special order. An $8 per-unit price wouldnt cover the full cost of the product in normal production