Unit 3 - Special Orders

Question 1

What are special orders?

Answer 1

These are when businesses receive orders that differ from their regular orders in terms of the profile. This difference is based on price paid, the quantity ordered or the lead time. These special orders may be one-off or they could be from a new buyer establishing a relationship with the supplier.
The decision to accept a special order depends upon the potential immediate and future quantitative and qualitative benefits that result from the order. The decision also involves a business assessing their current capacity levels and ability to meet a new order.

Question 2

What are the two types of measures used to value the impact of a special order?

Answer 2

. Qualitative measure
. Quantitative measure

Question 3

Explain the first stage in examining the value and impact of a special order using quantitative measures.

Answer 3

The business uses the contribution in this case. The contribution is the difference between revenue per unit and the variable cost per unit. It is known as the contribution because each item sold contributes towards paying other costs of the business e.g. fixed costs
Total contribution = contribution per item x number of items sold

Question 4

What are some other (qualitative) factors which a business should consider before accepting any special orders?

Answer 4

. Capacity - does the business have the spare capacity, and if so, is it the best way to use up the capacity - must the business invest in new technology to increase capacity etc.
. Labour demands - would the special order be completed in normal hours or will it require extra hours to be paid
. Future orders - could the special order lead to more regular orders
. Existing customers - will the special order upset existing customers who pay a higher price
. Product adjustment - would the special order require a product in any way different to the regular product

Question 5

What are some general advantages and disadvantages of a business accepting special orders?

Answer 5

Adv:
. Spare capacity - helps lower average costs
. Increases contribution - if the price covers variable costs the order contributes towards fixed costs and profit
. Improves cash flow - Generates additional short term revenue which could help with liquidity
. Improves access to new customers or markets
. Reduces waste - makes use of excess inventory or perishable stock

Disadv:
. Risk of lower profit margins - special orders are often sold at discounted prices, reducing contribution per unit
. Customer expectations - existing customers may demand lower prices if they become aware of the discount
. Capacity constraints - if the business is operating near full capacity, special orders may disrupt normal production
. Quality and reputation risks - rushing production or cutting costs to meet a special order may harm product quality
. Long-term pricing issue - accepting low-priced orders repeatedly can damage brand image or price positioning.