Performance Management · Make-or-buy and other short-term decisions

Shut-Down and Special Order Decisions in ACCA PM

Updated 11 October 2026 · Fact-checked

A shut-down decision compares the contribution a product, department or division earns with the fixed costs that would be saved if it closed. Close it only if avoidable fixed costs exceed lost contribution. A special order is accepted if its revenue exceeds its relevant costs, and spare capacity makes that likely.

Understand Shut-Down and Special Order Decisions

Both decisions use one idea: only future cash flows that change because of the decision matter. Costs you cannot avoid, and costs already incurred, are ignored.

In a shut-down decision, a unit that shows an accounting loss may still be worth keeping. The loss often includes allocated head office costs that continue after closure. If the unit earns a positive contribution, it helps pay those costs. Closing it removes the contribution but may not remove the cost.

So you compare two figures. The first is the contribution lost (sales less variable costs). The second is the avoidable fixed costs saved, such as a manager's salary or rent that ends on closure. If the saving is greater than the lost contribution, close. If not, keep it open.

In a special order decision, a customer asks for a one-off order, usually at a lower price. You do not use full cost. You calculate the relevant cost of the order: extra variable costs, any extra fixed costs, and opportunity costs. If there is spare capacity, the opportunity cost is zero. If capacity is full, you also lose the contribution from the sales displaced.

The maths is only half of the answer. Section C questions also ask for non-financial factors: effect on other customers' prices, staff morale, supplier links, brand image and whether the order could lead to repeat business.

Key rules to remember

Shut-down rule: Close if avoidable fixed costs > contribution lost; Use the contribution of the unit, not its accounting profit. Include only fixed costs that really stop on closure.
Net effect of closure: Gain/(loss) from closing = avoidable fixed costs saved − contribution lost; Add any other cash effects, such as redundancy costs, sale proceeds of assets or lost contribution on linked products.
Contribution: Contribution = sales revenue − variable costs; Variable costs include direct materials, direct labour if truly variable, and variable overheads.
Special order acceptance: Accept if order revenue > relevant costs of the order; Equivalent: accept if the order adds positive incremental profit.
Relevant cost with full capacity: Relevant cost = variable cost of order + contribution forgone on displaced sales; With spare capacity the contribution forgone is zero.
Minimum acceptable price: Minimum price = relevant cost of the order; This gives a floor price. Any price above it adds profit, though other factors may matter.

How to solve Shut-Down and Special Order Decisions questions

Use this method for any shut-down or special order question. Work with incremental figures only.

1Identify the decision: close a unit, or accept an order. Write the alternatives down.
2List every cost and revenue, then mark each as relevant or not. Ignore sunk costs, apportioned overheads that continue and committed costs.
3For a closure, calculate the contribution the unit earns. For an order, calculate the revenue and the extra variable costs.
4Identify avoidable fixed costs for a closure, or extra fixed costs and opportunity costs for an order. Check capacity: spare or full.
5Compare. Closure: avoidable fixed costs against lost contribution. Order: revenue against relevant costs. State the incremental profit or loss.
6Add other cash effects such as redundancy, asset sale proceeds, or knock-on effects on other products.
7Give a clear recommendation, then list relevant non-financial factors if the question asks for them.

Quickest way: Incremental profit shortcut

When to use it: Use this for Section A and B objective questions where you need a number fast.

Ignore total profit or loss shown in the question.
For closure, compute contribution minus avoidable fixed costs. If the result is positive, keep the unit open.
For an order, compute revenue minus relevant costs. If positive, accept.
Check for spare capacity. If capacity is full, subtract the contribution lost on displaced sales.
Scan the options. Watch for traps that include allocated fixed costs or sunk costs.

Common mistakes in Shut-Down and Special Order Decisions

Closing a unit because it shows an accounting loss.
The loss includes apportioned fixed costs that do not go away on closure.
Fix: Look at contribution and avoidable fixed costs only. A unit with positive contribution after avoidable costs should usually stay.
Treating all fixed costs as avoidable.
Students see 'fixed' and assume it is saved on closure.
Fix: Ask of each fixed cost: does it stop if we close? Allocated head office costs usually do not.
Using full absorption cost as the minimum price for a special order.
Students are used to cost-plus pricing.
Fix: Use relevant cost. With spare capacity, absorbed fixed overheads are ignored.
Ignoring opportunity cost when capacity is full.
Students stop after calculating variable cost.
Fix: Add the contribution lost from the sales you would give up to make the order.
Forgetting one-off cash effects of closure, such as redundancy costs or asset sale proceeds.
Students focus on the annual contribution.
Fix: Check the question for extra cash flows and include them in the comparison.
Giving only numbers and no recommendation or non-financial points.
Students run out of time in Section C.
Fix: End every answer with a clear decision and two or three qualitative factors.

Worked examples

Example 1

Division C has sales of ₹12,00,000, variable costs of ₹8,00,000, directly attributable fixed costs of ₹3,00,000 and apportioned head office costs of ₹2,00,000. The attributable fixed costs would stop if C closed. Head office costs would continue and be reallocated. Should C be closed?

Show the solution

Contribution = ₹12,00,000 − ₹8,00,000 = ₹4,00,000.
Avoidable fixed costs = ₹3,00,000. Head office costs are not avoidable, so ignore them.
Net effect of closure = ₹3,00,000 saved − ₹4,00,000 contribution lost = ₹1,00,000 loss.
The accounting loss is ₹12,00,000 − ₹8,00,000 − ₹3,00,000 − ₹2,00,000 = ₹1,00,000 loss, but the relevant figure shows C contributes ₹1,00,000 above its avoidable costs.

Answer: Do not close Division C. Closing would reduce group profit by ₹1,00,000, because C covers its avoidable costs and contributes to head office costs. Consider non-financial factors such as customers and staff before the final decision.

Example 2

A firm has spare capacity. A customer offers ₹90,000 for a one-off order of 500 units. Materials cost ₹60 per unit (already in stock, with no other use, and replacement would cost ₹80). Labour is ₹40 per unit, paid to existing staff who would otherwise be idle and cannot be laid off. Variable overhead is ₹20 per unit. Fixed overhead absorbed is ₹30 per unit. Should the order be accepted?

Show the solution

Materials: stock has no other use, so relevant cost is its disposal value, assumed nil. Do not use ₹60 or ₹80.
Labour: staff are paid anyway and would be idle, so relevant cost is nil.
Variable overhead: 500 × ₹20 = ₹10,000, assuming it is incurred because of the order.
Absorbed fixed overhead is not relevant.
Relevant cost = ₹0 + ₹0 + ₹10,000 = ₹10,000.
Incremental profit = ₹90,000 − ₹10,000 = ₹80,000.

Answer: Accept the order. It adds ₹80,000 to profit. The minimum acceptable price is ₹10,000 in total, so ₹90,000 is well above it. Check the effect on regular customers' price expectations before agreeing.

Exam tips

Read the question for words such as 'avoidable', 'would continue' and 'allocated'. They tell you which fixed costs are relevant.
In objective test cases, the trap answer is often the accounting profit or the full-cost figure. Work from contribution instead.
Always state whether capacity is spare or full before calculating an order's relevant cost.
In Section C, set out a short table of relevant figures, then give a decision, then non-financial factors. Markers reward this layout.
For closure of a product that others depend on, check for lost contribution on linked products.

Practice questions from Make-or-buy and other short-term decisions

Shut-Down and Special Order Decisions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Shut-Down and Special Order Decisions: frequently asked questions

What is an avoidable fixed cost?

It is a fixed cost that would stop if you closed the product, department or division. A dedicated manager's salary is an example. Allocated head office costs usually continue, so they are not avoidable.

Should I ever close a unit that earns positive contribution?

Yes, if its avoidable fixed costs are greater than its contribution. You may also close it if the resources freed can earn more elsewhere. The comparison must use relevant figures only.

What is the minimum price for a special order?

It is the relevant cost of the order. This includes extra variable costs, extra fixed costs and opportunity costs. With spare capacity it is usually just the incremental variable cost.

What non-financial factors matter in these decisions?

For closure: staff morale, customer relationships, reputation and the strategic fit of the unit. For special orders: effect on regular customers' prices, chance of repeat business and whether the order stretches capacity.