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Strategic Cost Management · Relevant Cost Analysis

Accept or Reject Special Order Decisions: Relevant Cost Method

Updated 11 October 2026 · Fact-checked

A special order decision asks whether a one-off order at a lower price adds to profit. Accept it if incremental revenue exceeds incremental cost, including any lost contribution from displaced sales or lost regular-price sales. Fixed costs that do not change are ignored. The minimum price equals relevant cost per unit.

Understand Accept or Reject Special Order Decisions

A special order is a one-off order, usually at a price below the normal selling price. A customer may offer it for a bulk quantity, a different market or a private label. You must decide whether to accept it.

The test is simple. Compare what the firm gains with what it gives up because of the order. Only relevant costs count: future costs and revenues that change if you accept. Sunk costs and fixed costs that stay the same are not relevant, even if the order price is below full cost per unit.

Capacity decides the answer. With idle capacity, the order uses resources that would otherwise be unused. The relevant cost is mainly the variable cost, plus any extra fixed cost caused by the order. With full capacity, accepting means giving up regular sales. The lost contribution from those sales is an opportunity cost and must be added.

Also look at non-numerical effects. Existing customers may learn of the low price and demand it too. That could reduce regular sales or force a price cut. The order may also bring goodwill, a new market or future business. Show the numbers first, then give a clear recommendation with these qualitative points.

Key rules to remember

Incremental profit
Incremental profit = Incremental revenue − Incremental (relevant) costs
Accept if the result is positive, subject to qualitative factors.
Relevant cost of the order
Relevant cost = Variable cost of the order + Additional fixed or specific costs + Opportunity cost
Opportunity cost is the contribution lost on regular sales displaced. It is zero with idle capacity.
Minimum acceptable price per unit
Minimum price = Relevant cost of the order ÷ Units in the order
With idle capacity and no extra fixed cost, this is the variable cost per unit. At this price profit is zero.
Opportunity cost at full capacity
Opportunity cost = Units displaced × Contribution per unit on regular sales
Use contribution, not profit, because fixed costs stay the same.
Material relevant cost
Stock material: replacement cost if it will be replaced; otherwise higher of resale value and use elsewhere. Material with no other use: disposal value or nil
Use current figures, not historical cost.

How to solve Accept or Reject Special Order Decisions questions

Use this order for any special order question. It keeps your answer structured and easy for the examiner to mark.

  1. 1Note the order quantity, offered price and current capacity. Check whether idle capacity is enough for the order.
  2. 2List every cost and mark it relevant or not. Relevant means future and different if you accept. Drop sunk costs, allocated fixed overheads and unchanged fixed costs.
  3. 3Restate each relevant cost at the correct value. Use replacement cost, or opportunity cost, for materials and labour where needed.
  4. 4Add the opportunity cost if capacity is short. Use contribution lost on displaced regular sales.
  5. 5Compute incremental revenue, total relevant cost and incremental profit. Also compute the minimum price per unit if asked.
  6. 6Check non-financial factors: effect on regular customers and prices, future business, brand and capacity for later orders.
  7. 7State the recommendation clearly: accept or reject, with the profit change and the main reason.

Quickest way: Contribution comparison in three lines

When to use it: Use it when the question gives variable cost per unit and says there is idle capacity, and asks only accept or reject or the minimum price.

  1. Find the contribution per unit on the order: offered price − variable cost per unit. Add any special variable cost such as packing or royalty.
  2. Multiply by order units, then subtract extra fixed cost caused by the order and any lost contribution.
  3. If the result is positive, accept. For minimum price, add extra fixed cost and lost contribution per unit to variable cost.
  4. Write one line on regular-customer risk and give your recommendation.

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 absorption cost, which includes fixed overheads that do not change.

    Fix: Compare the price with relevant cost only. Fixed costs that stay the same are ignored when capacity is idle.

  • Ignoring opportunity cost when capacity is full.

    Students focus on the order's own costs and forget what is given up.

    Fix: Check the capacity line first. If regular sales are displaced, add their lost contribution to the relevant cost.

  • Using historical cost for stock materials.

    The book value is given and looks like the cost.

    Fix: Use replacement cost if the material will be replaced, otherwise resale value or the best alternative use.

  • Deducting lost profit instead of lost contribution on displaced sales.

    Students confuse profit with contribution.

    Fix: Fixed costs continue anyway, so only the lost contribution is the sacrifice.

  • Giving only numbers and no recommendation.

    Students stop after computing the profit.

    Fix: End with a clear accept or reject statement. Add one or two qualitative factors such as effect on regular prices.

  • Treating the minimum price as the price to quote.

    The minimum price gives zero profit, and students read it as the right price.

    Fix: Say that it is the floor. The negotiated price should be above it to earn a profit.

Worked examples

Example 1

Sudarshan Components Ltd, Pune, makes 40,000 units a year against capacity of 60,000 units. Normal price is ₹150. Variable cost is ₹90 per unit and fixed cost is ₹12,00,000. A buyer offers to take 10,000 units at ₹100 each. No extra fixed cost arises and regular sales are unaffected. Should the order be accepted? What is the minimum price?

Show the solution
  1. Idle capacity is 20,000 units, so the 10,000 units fit without displacing regular sales.
  2. Incremental revenue = 10,000 × ₹100 = ₹10,00,000.
  3. Incremental variable cost = 10,000 × ₹90 = ₹9,00,000. Fixed cost of ₹12,00,000 is unchanged, so it is not relevant.
  4. Incremental profit = ₹10,00,000 − ₹9,00,000 = ₹1,00,000.
  5. Minimum price = ₹9,00,000 ÷ 10,000 = ₹90 per unit.

Answer: Accept. The order adds ₹1,00,000 to profit, subject to the buyer not affecting regular customers. The minimum price is ₹90 per unit.

Example 2

Kaveri Textiles Ltd works at full capacity of 50,000 metres. Regular price is ₹200 and variable cost is ₹120 per metre. A customer wants 8,000 metres at ₹170. Accepting means giving up 5,000 metres of regular sales, since only 3,000 metres can be made from spare capacity. The order needs special packing of ₹6 per metre. Should it be accepted? What is the minimum price?

Show the solution
  1. Spare capacity of 3,000 metres is stated, so 5,000 metres of regular sales are displaced.
  2. Incremental revenue = 8,000 × ₹170 = ₹13,60,000.
  3. Variable cost = 8,000 × ₹120 = ₹9,60,000. Packing = 8,000 × ₹6 = ₹48,000.
  4. Lost contribution on regular sales = 5,000 × (₹200 − ₹120) = 5,000 × ₹80 = ₹4,00,000.
  5. Total relevant cost = ₹9,60,000 + ₹48,000 + ₹4,00,000 = ₹14,08,000.
  6. Incremental profit = ₹13,60,000 − ₹14,08,000 = −₹48,000.
  7. Minimum price = ₹14,08,000 ÷ 8,000 = ₹176 per metre.

Answer: Reject at ₹170, as the order reduces profit by ₹48,000. The minimum price is ₹176 per metre, so the company should only accept at a higher price.

Exam tips

  • Read the capacity line before anything else. It decides whether opportunity cost enters the answer.
  • Show a table with incremental revenue, each relevant cost and the net result. Examiners give marks for each correct item.
  • State why you exclude fixed overheads, in one short line. This protects marks if your arithmetic slips.
  • Write a one-line recommendation and one qualitative point, since case-based questions ask for application and advice.
  • In MCQs, test the options by computing the minimum price quickly. The price must cover variable cost, extra fixed cost and lost contribution.

Practice questions from Relevant Cost Analysis

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.

Accept or Reject Special Order Decisions: frequently asked questions

How do you decide whether to accept a special order?

Compare the incremental revenue with the incremental relevant costs. Accept if the order adds to profit. Then check effects on regular customers and prices before you finalise.

What is the minimum price for a special order?

It is the relevant cost per unit: variable cost, plus extra fixed cost and any lost contribution, spread over the order units. At this price the profit is zero. With idle capacity and no extra fixed cost it equals variable cost per unit.

Why are fixed costs ignored in a special order decision?

Fixed costs that stay the same whether you accept or not do not change the profit. Only costs that differ between the two choices are relevant. Fixed costs caused by the order, such as a new machine for it, are relevant.

What changes when the firm has no idle capacity?

Accepting the order displaces regular sales. You must add the lost contribution on those sales as an opportunity cost. This often raises the minimum price above the normal variable cost.