Operations management

Table of Contents

1. Topic pack - Operations management - introduction
2. Operations Management (OM) - Introduction
3. 5.1 Production methods notes
4. 5.1 Production methods - questions
5. 5.2 Costs and revenues - notes
   1. Costs and revenues
   2. Types of costs
   3. Costs and revenue - shape of cost curves
   4. Costs - fixed and variable - examples
   5. Revenue
   6. Mattel 1Q Profit Falls On Higher Expenses
   7. Costs and decisions
   8. Contribution to fixed costs
   9. Contribution analysis for multi-product firms
   10. Special orders
   11. Cost centres and profit centres
   12. Why have cost and profit centres?
   13. Apportioning costs to profit and cost centres
   14. Full Costing
   15. Absorption costing
6. 5.2 Costs and revenues - questions
7. 5.3 Break-even analysis - notes
8. 5.3 Break-even analysis - questions
9. 5.3 Break-even analysis - simulations and activities
10. 5.4 Quality assurance - notes
11. 5.4 Quality assurance - questions and activities
12. 5.5 Location - notes
13. Innovation - notes (HL only)
14. 5.6 Innovation - questions
15. 5.7 Production planning - notes
16. 5.7 Production planning - questions
17. 5.8 Project management - notes (HL only)
18. 5.8 Project management - questions (HL only)
19. Print View

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:

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.