Special Order Pricing - Accounting

The video tutorial discusses special order pricing, a scenario where a customer requests a price lower than the normal sales price. It explores the reasons a company might accept such an order, including utilizing extra production capacity. The tutorial also highlights qualitative considerations, such as the precedent set for future orders and the reaction of regular customers. An example is provided where a company evaluates a special order for widgets, initially appearing as a loss but ultimately showing a gain when fixed costs are excluded. The tutorial emphasizes the importance of understanding relevant costs in decision-making.

What is a common reason for a company to accept a special order pricing request?

• To increase the regular sales price

• To utilize extra production capacity

• To decrease the number of regular customers

• To reduce the quality of the product

Which of the following is a qualitative issue to consider when accepting a special order?

• The location of the customer

• The weather conditions

• The color of the product

• The precedent it sets for future orders

In the widget example, what is the total cost per unit before considering fixed costs?

• $26

• $25

• $19

• $30

Why are fixed costs considered irrelevant in the special order pricing decision?

• They are not part of the production process

• They are always higher than variable costs

• They remain constant regardless of production levels

• They change with the number of units produced

What is the contribution margin per unit in the widget example after excluding fixed costs?

• $1

• $6

• $5

• $7