Business Paper 2 - Special Orders (210)

Special Orders

is an extra order or an order for an item specially requested by a customer

the difference is often based on:

• price paid

• quantity ordered

• lead time

it could be a one-off order or a new buyer establishing a relationship with the supplier (business)

special order can involve:

• selling the same product at a lower than normal sales price

• selling a modified product at a higher price

How to calculate Special Orders

• if profit is not given, calculate this - total revenue - total costs

• contribution per unit = selling price - variable cost per unit

• total contribution = contribution per unit x quantity sold

• total contribution = total revenue - total variable costs

What does a business need to consider before accepting the order?

• do they have spare capacity or is this the best way to utilise the spare capacity

• would extra hours have to be paid to workers

• will it upset existing customers who pay a higher price

• does the product process need to change - using different materials and training workers?

Accept or Decline?

• 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

• 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?

• 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

• 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