Special-order decisions

Special-order decisions involve situations in which management must decide whether to accept unusual customer orders. These orders typically require special processing or involve a request for a low price. The ultimate point in dealing with special orders is whether the firm can generate some amount of incremental profit by agreeing to process the order. When making this decision, one must compare the incremental change in revenue for the firm, against which is offset the incremental change in costs. One must also consider whether there is a sufficient amount of incremental production capacity available that can be used to process the additional order.

A common flaw made when dealing with special-order decisions is to not recognize that the order will take production capacity away from existing orders that generate a higher profit, resulting in a net decline in total profit for the business.

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