Special order and minimum price
With spare capacity only variable costs count; an order below full cost can still pay off if its contribution is positive.
Worked example
A firm has spare capacity. Normal price £45.00, variable cost £30.00 per unit, fixed costs £199,000.00 at 8,400 units (full cost £53.69 per unit). A customer offers £44.50 each for an extra order of 700 units; capacity is enough and normal sales stay the same.
Worked solution
- 1.With spare capacity the fixed costs arise anyway; only variable costs matter.
- 2.Minimum price = variable cost = £30.00
- 3.Contribution = (£44.50 − £30.00) × 700 = £10,150.00 → accept
Typical mistake: Deciding on full cost per unit and rejecting an order with a positive contribution.
Your turn
Three problems of exactly this type, each time with new numbers. Amounts with or without thousands separators.
Task
A firm has spare capacity. Normal price £104.50, variable cost £75.50 per unit, fixed costs £56,000.00 at 9,700 units (full cost £81.27 per unit). A customer offers £76.00 each for an extra order of 700 units; capacity is enough and normal sales stay the same.
Short-term minimum price per unit in £
Contribution of the extra order in £ (negative with a minus)
Decision
Amounts like 12,500 or 12500.50; percentages as a number (12.5). Round to the penny or 2 decimal places.
Formulas for this topic
- Minimum price with spare capacity = variable cost per unit
- Accept a special order if its contribution is positive
- With a limiting factor, rank by contribution per unit of that factor
Typical mistake: Deciding on full cost per unit and rejecting an order with a positive contribution.
Frequently asked questions
What is the typical mistake in "Special order and minimum price"?
Deciding on full cost per unit and rejecting an order with a positive contribution.
Why ignore fixed costs for a special order?
They arise with or without the order; every pound above variable cost improves the result.