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Special orders

Let's look at an example of the last option from the previous page - acceptance of special orders:

Computers for Germany - special order

Student Computers plc. has received an order for 500 computers from a University in Germany, which is not one of their regular markets and is not included in their sales plan. The computers normally sell for $500, but the German University is only prepared to pay $350. The cost structure of the product is shown as:

Price $500
Variable cost $200
Allocated overheads $200
Profit $100

The view of some managers is that they should refuse the order since they will make a loss of $50 per computer if price is only $350 instead of the normal $500. However, because it is a special order all the overheads are already allocated. This means that the computers will make a contribution of $150 each to fixed costs. On this basis, the order should be taken on financial grounds, as this contribution is actually profit as fixed costs have been paid.

There may still be grounds for refusal, though. Will the order and its lower price:

  • encourage existing customers to expect a similar reduction in price?
  • set a precedent for future sales?
  • affect brand image?

If the answer to any of these questions is 'yes', it may be wise to refuse the order, or at least try to negotiate a higher price.