Managerial Accounting: Special Order Decision Making

This article discusses the decision-making process for special orders in managerial accounting. It covers opportunity cost, production capacity, variable costs, and qualitative aspects of the decision. The article provides a step-by-step analysis of a special order decision and highlights the importance of considering both quantitative and qualitative aspects of the decision. The subject is Managerial Accounting and the article includes references to various authors and their works.

MANAGERIAL ACCOUNTING
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Question 1
The approach pursued by Diane is not correct since it fails to consider the various costs that
would not be incurred if the offer is accepted. Opportunity cost tends to highlight the
potential gains lost by preferring a particular alternative over the other alternatives. Hence, in
the given case, if the offer is accepted, the reduced costs owing to certain costs which would
not be incurred is a gain which ought to be taken into consideration (Northington, 2015).
Question 2
It is known that currently the capacity is 4000 unit but the production is being done at 90%
levels.
Hence, production levels currently = 0.9*4000 = 3,600
Special order size is 250
Thus, if company cannot enhance production level, then 250 PVR’s less would be sold to the
existing customers so as to fulfil the special order.
Question 3
By accepting the special order, there would be no change in the fixed overhead and also
variable selling costs would not be incurred since this is a direct order (Damodaran, 2015).
Hence, loss in profit per unit owing to selling at $ 280 instead of $ 320 = $ 40
However, per unit savings on fixed costs and variable costs = $ 70
Clearly the savings tend to be greater than the loss in profit on a unit basis and hence, the
opportunity cost would be (40-70) or-$ 30.
Question 4
Since there is no effect on the existing orders, it is imperative to determine the profit margin
per unit on this order which is shown below.

Hence total increase in profits = 110*250 = $27,500
Question 5
If TBD is operating at 75% capacity utilisation, it would imply that the special order can be
fulfilled without affecting the existing orders. It is apparent that total variable cost for
production of 1 PVR is $ 170 and this should be the minimum price that TBD should be
willing to accept on a per unit basis. This is because there is no fixed cost incurred for this
special order and only variables costs are incurred which ought to be recovered. Thus, the
minimum quote would be $ 170 per unit (Parrino & Kidwell, 2014).
Question 6
The quantitative aspects that have been considered but the qualitative aspects also need to be
considered which are highlighted as follows (Brealey, Myers & Allen, 2014).
 Establishing relationship with a reputed company which in the future can provide
more orders on a consistent basis.
 Supplying orders to reputed company such as Fitch Limited could provide a big boost
to the image of TBD and thus help it enhance the supply to existing customers or may
even allow it to increase market share.

References
Brealey, R. A., Myers, S. C., & Allen, F. (2014) Principles of corporate finance, 2nd ed. New
York: McGraw-Hill Inc.
Damodaran, A. (2015). Applied corporate finance: A user’s manual 3rd ed. New York:
Wiley, John & Sons.
Northington, S. (2015) Finance, 4th ed. New York: Ferguson
Parrino, R. & Kidwell, D. (2014) Fundamentals of Corporate Finance, 3rd ed. London:
Wiley Publications