210-Special orders

Question 1

Explain what is meant by special orders

Answer 1

Occasionally, businesses may receive orders for their products that differ. Difference is often based on: Price paid, The quantity of the order and the lead time. These special orders can be one-off or they could be a new buyer establishing a relationship with the supplier.

Question 2

What can a special order involve?

Answer 2

-Selling the same product lower than the normal sales price
-Selling a modified product at a higher price

Question 3

What does the decision to accept a special order depend on?

Answer 3

The potential immediate and future quantitative and qualitative benefits that result from the order.

Question 4

What is the first stage in examining the value and impact of a special order

Answer 4

Contribution (quantitative) = Generated revenue - costs of production (VC)

Question 5

Factors that affect the decision to accept a special order

Answer 5

-capacity
-Labour demands
-Future orders
-Existing customers
-Product adjustment - if yes it could involve new materials, workers etc

Question 6

Advantages of accepting special orders (5)

Answer 6

(+) Further orders may follow. Some businesses will accept an unprofitable special order if there is a possibility that it will result in a profitable regular and long term order.

(+)Spare capacity is used, increasing return on capital invested.

(+)The new order may give access to new markets and new opportunities e.g. is it from overseas leading to new export markets or is it in a different market?

(+)Increasing production can have HRM benefits, such as increased wages for workers and payment of bonuses.

(+) Also it can be useful to keep workers busy if the normal orders are not sufficient due to poor economic conditions. Special orders can help keep workers in their jobs.

Question 7

Disadvantages/HIDO of accepting special orders (4)

Answer 7

(-)Working at near or at full capacity can put pressure on quality. If the business is already operating at full capacity how can it cope with existing customers in addition to the special order?

(-)What if existing customers discover the discounted price offered to the new customer? Will they demand the same? They may become resentful and could look for a new supplier.

(-)Will the new customer demand even lower prices in the future and will there be a requirement to prioritise the new order over existing customers? This could have an adverse effect on loyal and long term customers.

(-)The new customer may undercut existing customers when selling the finished product. This could impact on their sales, which could then impact on future orders.