Special Order Pricing

SPECIAL ORDER PRICING 3

SpecialOrder Pricing

Anorganization needs to consider some factors, when deciding on whetherto accept/reject a special order the factors comprise of financialand non-financial considerations. The financial considerationsinclude fixed cost, marginal cost and profit. In case the price beingoffered is above the marginal cost, then the special order should beaccepted and should be rejected if the price offered falls below themarginal cost. When making a decision to reject/accept the specialorder, it is critical to consider incremental fixed cost. In case thespecial order will have an incremental fixed cost, then the specialorder should be rejected. Besides, profitability is critical inmaking the accept/reject decision in case the special order is notprofitable, it should be rejected (Jacksonet al, 2009).

Onthe other hand, the non-financial factors include the operation levelof the organization, the effect on future earnings, and impact onexisting customers (Jacksonet al, 2009). Operation capacity of an organization is critical sincein case the organization does not have an idle capacity, thenconsidering accepting the special order will be wastage to the firm.Thus, the special order should be accepted in case the organizationis operating below the full capacity. Effect on the future earningsis also another critical factor to consider, when making the decisionto accept/reject special order. In case the special order will havean effect of reducing the future revenues because of the temporaryreduction in the selling price, then the special order should berejected. In addition, the impact on the existing customers, whenthey come to notice of the price reduction for the special order is acritical factor. In case, the special order will have a negativeimpact on the existing customers, when they come to know of the pricereduction for the special order, then the special order should berejected (Jacksonet al, 2009).

References

Jackson,S., Sawyers, R., &amp Jenkins, J. G. (2009).&nbspManagerialaccounting: A focus on ethical decision making.Mason, OH: South-Western.