Special order decisions: using contribution per unit to decide whether to accept a special order, including the relevant costs and the qualitative factors involved.

What this dot point is asking

WJEC Unit 3 includes the special order decision: whether to accept a one-off order at a price below the normal selling price. The key tool is contribution (price minus variable cost), and the key insight is that with spare capacity, fixed costs are already covered, so any positive contribution adds to profit. Strong answers do the contribution calculation, apply the spare-capacity logic, and weigh the qualitative risks - above all the danger of undercutting normal prices.

The answer

What a special order decision is

The contribution approach

This is why a firm might accept an order at, say, £14 when its full cost is £16 a unit: if the variable cost is only £9, each unit still contributes £5, and with spare capacity that £5 is pure extra profit.

Relevant costs

The relevant costs of a special order are the costs that change because of it - normally the variable costs of producing the extra units. Fixed costs are not relevant if they stay the same whether or not the order is accepted. But if the order requires extra capacity (overtime, new equipment, hiring), those additional costs become relevant and must be covered by the order's revenue too. With no spare capacity, accepting the order may also mean turning away full-price work (an opportunity cost).

Qualitative factors

The numbers are not the whole story. Before accepting, a firm should weigh:

• Undercutting normal prices - the biggest risk: if regular customers discover the lower price, they may demand it too, damaging revenue.
• Image - a low price may cheapen a premium brand.
• Displacing full-price work - accepting a low-price order should not crowd out higher-margin business.
• The customer - reliability, the chance of repeat business, and whether the order builds a useful relationship.

Examples in context

Example 1. Accepting with spare capacity. A printing firm with idle machines accepts a one-off order at a price below its normal rate because the price still exceeds the variable cost of ink, paper and power, so each unit contributes to profit that would otherwise not exist. The fixed costs of the machines and premises are already covered by regular work. The example shows the core principle: spare capacity plus positive contribution equals extra profit.

Example 2. Rejecting to protect prices. A premium brand turns down a large special order at a low price, even though it would generate positive contribution, because it fears that regular customers would discover the discount and demand it, eroding the brand's pricing power and image. The example illustrates a case where the qualitative factor (protecting normal prices and brand image) rightly overrides a favourable contribution calculation.

Try this

Q1. Explain why fixed costs are usually ignored in a special order decision when there is spare capacity. [3 marks]

• Cue. With spare capacity, fixed costs are already covered by normal production and do not change if the order is accepted, so they are not relevant; only the extra (variable) costs matter.

Q2. A special order of 300 units is offered at £12 each; variable cost is £8 per unit and there is spare capacity. Calculate the total contribution from the order. [2 marks]

• Cue. Contribution per unit = £12 - £8 = £4. Total contribution = £4 x 300 = £1,200.