Management Accounting · Applications of Marginal Costing in Short Term Decision Making

Accept or Reject Special Order and Pricing Decisions

Updated 10 October 2026 · Fact-checked

A special order or export offer is accepted if its price is above the relevant (marginal) cost per unit and it adds positive contribution without disturbing regular sales. Fixed costs already being incurred are ignored. The minimum price is marginal cost plus any opportunity cost or extra specific cost. Compare total incremental revenue with incremental cost.

Understand Accept or Reject Special Order and Pricing Decisions

A special order is a one-time order, often from an export buyer or a bulk customer, at a price lower than the normal selling price. The question is simple: will the firm be better off with the order than without it?

To answer it, you use marginal costing. When the factory has spare capacity, fixed costs such as rent, supervisor salary and depreciation are the same whether or not you accept the order. They are not relevant. Only the costs that change because of the order matter. These are the relevant costs: variable material, variable labour, variable overhead, and any extra cost caused only by this order, such as special packing, export freight or a new tool.

If the order price per unit is higher than the relevant cost per unit, the order earns contribution, and that contribution adds directly to profit. So a price below full (absorption) cost can still be acceptable. The full cost includes fixed overhead that you would bear anyway.

The minimum price is the lowest price at which the firm does not lose from the order. With spare capacity it equals marginal cost plus specific extra costs. If capacity is full, the order displaces regular sales, so you add the opportunity cost (contribution lost). The decision also has non-numerical limits: the order should not spoil the regular market, force price cuts for existing customers, or be a repeat order that cannot be sustained.

Key rules to remember

Marginal cost per unit: Marginal cost = Direct material + Direct labour + Direct expenses + Variable overhead; Use only costs that vary with output.
Contribution of the order: Contribution = (Offer price per unit − Marginal cost per unit) × Order units − Specific extra costs − Contribution lost on displaced regular sales; With spare capacity, no regular sales are displaced, so the last term is nil. Accept if the result is positive. With no spare capacity, subtract the contribution lost on the regular units given up.
Minimum price (spare capacity): Minimum price = Marginal cost per unit + (Specific extra costs of the order ÷ Order units); Specific extra costs include any specific fixed costs and extra variable costs (such as packing and freight) not already in marginal cost. Divide the total by order units.
Minimum price (no spare capacity): Minimum price = Marginal cost + Contribution lost on displaced regular sales per unit of order; Opportunity cost is added when regular units are given up.
Incremental profit: Incremental profit = Incremental revenue − Incremental cost; Same answer as the contribution method, shown as a comparison of two situations.

How to solve Accept or Reject Special Order and Pricing Decisions questions

Use this method for any special order, export offer or minimum price question.

1Read the data and check capacity: how much spare capacity exists, and how many units the order needs.
2Separate costs into variable, fixed already incurred, and new specific costs caused by the order.
3Compute the marginal cost per unit. Leave out existing fixed overhead and any sunk cost.
4If the order exceeds spare capacity, work out how many regular units are displaced and the contribution lost on them.
5Compute order contribution: (offer price − marginal cost) × units, less specific costs and less opportunity cost.
6Take the decision: accept if net contribution is positive. For minimum price, find the price where net contribution is zero.
7Add qualitative points in one or two lines: effect on regular customers, price cuts demanded elsewhere, and whether the order is one-time.
8Where required, show a before-and-after profit statement to prove the decision.

Quickest way: Contribution check in three lines

When to use it: Use it when the question asks only for a yes or no, or for a minimum price, and you are short of time.

Write marginal cost per unit from the cost sheet by deleting fixed overhead.
Add specific order costs per unit and any opportunity cost per unit. This is your minimum price.
Compare it with the offer price: accept if the offer is higher, reject if lower.

Common mistakes in Accept or Reject Special Order and Pricing Decisions

Rejecting an order because the offer price is below total cost per unit.
Students compare the price with the absorption cost, which includes fixed overhead.
Fix: Compare the price with marginal cost. Fixed cost already being incurred is not relevant when capacity is spare.
Ignoring extra costs of the order such as packing, freight or a special licence.
Students copy the usual cost sheet and miss the details in the question.
Fix: Scan the question for words like 'additional', 'special' and 'export' and list each cost that exists only because of the order.
Not adding opportunity cost when the order uses capacity needed for regular sales.
Students assume capacity is always spare.
Fix: Check capacity first. Compute displaced units and their contribution, and subtract it from the order's contribution.
Treating a variable cost saving as fixed, for example selling commission that is not paid on an export order.
Students use the standard cost per unit without checking what changes.
Fix: Remove costs that will not be incurred on this order, and add costs that will.
Giving only a numerical answer with no comment.
Students stop once the contribution is positive.
Fix: Add a short note on market effects, one-time nature and capacity, as ICMAI expects interpretation.

Worked examples

Example 1

Shree Textiles makes 50,000 units a year against capacity of 80,000 units. Selling price is ₹100 per unit. Variable cost is ₹60 per unit and fixed cost is ₹10,00,000 a year (₹20 per unit at 50,000 units). A foreign buyer offers to buy 20,000 units at ₹70 per unit. No extra fixed cost arises. Should the order be accepted?

Show the solution

Spare capacity = 80,000 − 50,000 = 30,000 units. The order of 20,000 units fits, so no regular sales are lost.
Marginal cost = ₹60 per unit. Fixed cost is unchanged and is ignored.
Contribution per unit = ₹70 − ₹60 = ₹10.
Total contribution = ₹10 × 20,000 = ₹2,00,000.
Check: full cost per unit is ₹80, above ₹70, but this is not relevant here.

Answer: Accept the order. It adds ₹2,00,000 to profit. Profit rises from ₹10,00,000 (contribution ₹40 × 50,000 = ₹20,00,000 less fixed cost ₹10,00,000 = ₹10,00,000) to ₹12,00,000, provided the regular market is not affected.

Example 2

Kaveri Ltd has capacity of 10,000 units and sells all of them at ₹150. Variable cost is ₹90 per unit. An export order for 2,000 units is offered. Since all capacity is used, accepting it means giving up 2,000 regular units. Export packing and freight will cost ₹8 per unit on the order, and a one-time export licence will cost ₹20,000. Find the minimum acceptable price per unit.

Show the solution

Spare capacity is nil. Order is 2,000 units, so 2,000 regular units are displaced.
Regular contribution per unit = ₹150 − ₹90 = ₹60.
Contribution lost = ₹60 × 2,000 = ₹1,20,000.
Marginal cost of order units = ₹90 × 2,000 = ₹1,80,000.
Packing and freight = ₹8 × 2,000 = ₹16,000. Licence = ₹20,000.
Total relevant cost = ₹1,80,000 + ₹16,000 + ₹20,000 + ₹1,20,000 = ₹3,36,000.
Minimum price per unit = ₹3,36,000 ÷ 2,000 = ₹168.

Answer: The minimum acceptable price is ₹168 per unit. Any offer above ₹168 increases profit.

Exam tips

Write the capacity check as your first line. Examiners award marks for noticing spare capacity or the lack of it.
Show a short table of relevant costs rather than the full cost sheet. It earns step marks and saves time.
For MCQs, subtract fixed cost first and look at contribution. Many options are traps built on absorption cost.
Always add a one-line qualitative comment on regular customers and one-time nature in written answers.
In minimum price questions, show the build-up: marginal cost, specific cost, opportunity cost, then divide by units.

Practice questions from Applications of Marginal Costing in Short Term Decision Making

Accept or Reject Special Order and Pricing 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 and Pricing Decisions: frequently asked questions

Can a firm accept an order below its total cost?

Yes, if spare capacity exists and the price exceeds marginal cost. The fixed cost is already being incurred, so the order adds contribution. In the long run, however, prices must cover total cost.

What is the minimum price in a special order decision?

It is the marginal cost per unit plus any specific costs of the order and any opportunity cost of lost regular sales. At this price the order neither adds to nor reduces profit.

When do fixed costs become relevant in a special order?

When the order causes a new fixed cost, such as a new machine, licence or supervisor hired only for it. Step-fixed costs that rise because of added output are also relevant.

What non-financial factors affect accepting an export order?

Look at the effect on existing customers, the risk of price pressure in the home market, the chance of repeat business, and the buyer's payment reliability. Mention these briefly in written answers.