Strategic Cost Management · Decisions involving Alternative Choices

Accept or Reject Special Order Decisions in Cost Management

Updated 11 October 2026 · Fact-checked

A special order decision asks whether to accept an extra order at a price below the normal price. Compare the order's incremental revenue with its incremental (relevant) costs. If incremental revenue exceeds incremental cost, the order adds profit. Check spare capacity, lost sales and any one-time costs before you accept.

Understand Accept or Reject Special Order Decisions

A special order is a one-time or extra order, often from an export buyer or a bulk buyer, offered at a price below your normal selling price. The question is simple: will accepting it make the company better off than rejecting it?

The answer does not depend on the full cost per unit. Fixed costs already exist. If they do not change because of the order, they are not relevant. Only costs that change if you accept the order are relevant. These are called incremental costs. They include variable material, variable labour, variable overhead, and any new fixed cost caused by the order, such as a special tool or a one-time design fee.

So the test is the contribution approach. Contribution from the order = special price per unit − relevant variable cost per unit. If total incremental contribution is more than any new fixed cost and any opportunity cost, accept the order. A price below full cost can still be acceptable. A price above variable cost but below full cost still adds to profit when there is idle capacity.

Capacity decides the next step. With spare capacity, there is no opportunity cost. With full capacity, producing the special order means giving up regular sales or paying for overtime or outsourcing. The lost contribution on displaced sales is then a relevant cost.

Non-financial factors matter too. Regular customers may demand the same lower price. The order may damage the brand or create a price-cutting habit. Exports may bring legal or quality conditions. Mention these briefly after your numbers, but base the decision on the calculation.

Key rules to remember

Contribution per unit on the special order: Special price per unit − Relevant variable cost per unit; Use only costs that change because of the order. Ignore apportioned fixed costs that do not change.
Incremental profit with spare capacity: (Special price − Variable cost per unit) × Order units − Additional fixed costs of the order; Accept if the result is positive, subject to non-financial factors.
Incremental profit at full capacity: Incremental revenue − Incremental costs − Contribution lost on displaced regular sales; The lost contribution is an opportunity cost. Include it only for units of regular sales actually displaced.
Minimum acceptable price per unit: Relevant variable cost per unit + Additional fixed cost ÷ Order units + Opportunity cost per unit; This is the price at which the order just breaks even. Any price above it adds profit.

How to solve Accept or Reject Special Order Decisions questions

Use this method for any accept-or-reject question on a special or export order.

1Read the data and list the order quantity, offered price, and the company's current capacity and output.
2Check capacity. Work out the spare capacity and whether it covers the order. If not, find how many regular units would be displaced.
3Pick the relevant costs. Take variable material, labour and variable overhead. Add any new fixed cost caused by the order. Drop fixed costs that stay the same.
4Adjust for special conditions. Include things such as extra packing, freight, export commission or a changed material price. Remove costs that the order does not need, such as selling expenses that are not incurred.
5Compute incremental revenue, incremental cost and, if capacity is full, the contribution lost on displaced sales.
6Find incremental profit or the minimum acceptable price. Compare it with the offered price.
7State a clear recommendation, accept or reject, with the figure that supports it. Add one or two non-financial points.

Quickest way: Contribution-per-unit shortcut

When to use it: Use it when capacity is spare and the order has no or small extra fixed costs. It is the fastest route in a time-pressed paper.

Write the special price per unit.
Subtract the relevant variable cost per unit to get the contribution per unit.
If contribution is positive, multiply by order units and subtract any extra fixed cost.
If capacity is short, subtract the contribution lost on the displaced regular units.
If the net figure is positive, accept. Write the final line in one sentence.

Common mistakes in Accept or Reject Special Order Decisions

Rejecting the order because the price is below full cost per unit.
Students compare the price with total cost including fixed overhead, which is not relevant when fixed cost is unchanged.
Fix: Compare the price with the relevant variable cost. Fixed costs that do not change are ignored.
Ignoring the opportunity cost when capacity is full.
Students focus on the order's own numbers and forget what is given up.
Fix: Always check spare capacity first. If regular sales are displaced, deduct their lost contribution.
Including sunk or apportioned fixed overhead in the incremental cost.
The question gives a full cost sheet and students use all of it.
Fix: Tick each item and ask: does it change if we accept? Only then include it.
Missing extra costs specific to the order, such as special packing, freight, or a one-time tool.
These appear in a short note and are easy to overlook.
Fix: Read the question twice and underline every cost that arises only because of this order.
Including costs that the order does not need, like normal selling expenses or sales commission.
Students copy the standard cost sheet without adjustment.
Fix: Remove costs the order will not incur. Check each selling and distribution item.
Giving the number but no recommendation.
Students stop after the calculation.
Fix: End with a clear accept or reject statement, and mention a non-financial factor in one line.

Worked examples

Example 1

Vardhan Auto Ltd makes a component with a normal capacity of 50,000 units a year and currently produces 40,000 units. Selling price is ₹120 per unit. Variable cost per unit is ₹80 (material ₹45, labour ₹25, variable overhead ₹10). Fixed costs are ₹8,00,000 a year. An export buyer offers to buy 6,000 units at ₹95 per unit. No extra fixed cost arises. Should the order be accepted?

Show the solution

Spare capacity = 50,000 − 40,000 = 10,000 units. The order of 6,000 units fits, so no regular sales are lost.
Relevant variable cost = ₹80 per unit.
Contribution per unit = ₹95 − ₹80 = ₹15.
Total incremental contribution = 6,000 × ₹15 = ₹90,000.
Fixed costs do not change, so they are ignored. Full cost per unit at current output is ₹80 + ₹8,00,000 ÷ 40,000 = ₹100, which is above ₹95, but this is not the test.

Answer: Accept the order. It adds ₹90,000 to profit. Check that the export price does not affect regular customer prices.

Example 2

Kaveri Textiles Ltd has capacity of 20,000 metres and is fully used on regular sales at ₹150 per metre. Variable cost is ₹100 per metre. A buyer wants 5,000 metres at ₹130 per metre. Special packing will cost ₹4 per metre extra, and a one-time design fee of ₹10,000 is needed. To make the order, 5,000 metres of regular sales must be given up. Should the order be accepted?

Show the solution

Incremental revenue = 5,000 × ₹130 = ₹6,50,000.
Incremental variable cost = 5,000 × (₹100 + ₹4) = 5,000 × ₹104 = ₹5,20,000.
One-time design fee = ₹10,000.
Contribution lost on displaced regular sales = 5,000 × (₹150 − ₹100) = 5,000 × ₹50 = ₹2,50,000.
Net incremental profit = ₹6,50,000 − ₹5,20,000 − ₹10,000 − ₹2,50,000 = −₹1,30,000.
Minimum acceptable price per metre = ₹104 + ₹10,000 ÷ 5,000 + ₹50 = ₹104 + ₹2 + ₹50 = ₹156. The offered price of ₹130 is lower.

Answer: Reject the order. It reduces profit by ₹1,30,000 because the regular sales given up are more valuable. The order would break even only at ₹156 per metre.

Exam tips

Start with the capacity check. Many questions are built so that the answer changes once capacity is full.
Show a short statement of incremental revenue and costs in a table-like list. It earns method marks even if you slip on one figure.
Write the final recommendation in one clear sentence and add one non-financial factor, such as effect on regular customers' prices.
In MCQs, look for the trap: the offered price is below full cost but above variable cost, and capacity is spare. Usually the order is acceptable.
Watch the wording about fixed costs. 'Additional' or 'specific' fixed cost is relevant, while 'existing' or 'apportioned' fixed cost is not.

Practice questions from Decisions involving Alternative Choices

Accept or Reject 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.

CMA IntermediateAccept or Reject Special Order and Pricing Decisions

Accept or Reject Special Order Decisions: frequently asked questions

Can a company accept a special order below total cost?

Yes, if the price is above the relevant variable cost and there is spare capacity, with no extra fixed cost that outweighs the contribution. The fixed costs are already incurred, so the order adds to profit. Check the effect on regular customers before you decide.

What is the relevant cost in a special order decision?

Relevant costs are future costs that change if the order is accepted. These are variable costs, new fixed costs caused by the order and the opportunity cost of lost sales. Sunk and unchanged fixed costs are ignored.

What changes when the factory is already at full capacity?

You must include the contribution lost on regular sales that are displaced, or the extra cost of overtime or outsourcing. The special price must cover these as well as the variable cost. Often this makes the order unattractive.

Do I include non-financial factors in the answer?

Yes, briefly. Mention things like customer reaction to price cuts, brand image and the chance of repeat business. The decision should still rest mainly on the incremental calculation.