 Hello and welcome to the session in which we will discuss special orders which is either accept or reject those special orders. First, what is a special order? Well, it's basically a one-time order that's considered not part of the company's not normal ongoing business. So simply put out of nowhere you got a customer that's asking you to give them a special price. Why? Well, this customer does not compete with you in your market area. Maybe this customer is operating in South America and you don't sell your product in South America and they're asking for a special price. So it's okay to give them a special price because it's not going to eat up from your own sales from your own market. So what is the rule when you get a special order? Well, you would accept the special order they're looking for a special price if the incremental benefit is greater than the incremental cost. Simply put, as long as you can benefit more that the cost you are going to be incurring for this special order go ahead and accept. And here what we assume is the fixed manufacturing overhead cost is not affected. Simply put, fixed manufacturing overhead is not relevant. So what we are assuming here is we have enough capacity where fixed overhead cost is irrelevant. We don't have to take it into account. The best way to illustrate this is to look at an example. So let's assume Adam makes a single product whose normal selling price is $200. A foreign distributor came asking to purchase 3,000 units at $100. They want to buy it half of the price. Now this foreign distributor does not sell in our area, does not compete with our distribution network. So if we sell it to them it won't affect what we do now. Annual capacity is 10,000 units. Right now we are only producing and selling 5,000. So simply put we have plenty of capacity because if we have a 10,000 unit capacity we're producing 5,000 units. It means we still have another 5,000 unit of capacity and they're asking for 3. So the capacity is there. We don't need to incur any additional fixed cost. So what we do is we're going to look at our contribution income statement and we're going to see what we have. Right now we're selling 5,000 units each at $200. Our total sales is a million. Our direct material is 200,000. Simply put that's going to translate into $40 per unit which is 200,000 divided by 5,000 unit. Our direct labor cost is 50,000. It's going to translate into $10 of direct labor cost 50,000 divided by 5,000 unit. Our manufacturing overhead is 100,000 which is going to translate into $20 and marketing variable cost is $10. So all in all 40 plus 10 is 50 plus 20 plus 10 equal to $80. Now we also have fixed cost manufacturing overhead cost which we assume we are not going to incur for this purpose and marketing cost there is no really no marketing fixed overhead cost because the customer came to us. Should we sell except this $100 price and the answer is I would say we should. Why? Because right now our total total variable cost is 80 and we could also eliminate the marketing cost there is no need for even we can argue there is no need for marketing cost because the customer came to us. So really the additional cost is 70 and the incremental benefit is 100. So yes we would accept this order again assuming they don't sell where we sell our product. They don't compete with our current distribution network. Now this is one way to look at special orders. Another way is to when you are giving those special orders is what is the minimum price to charge when you have this special order. So it's very important to understand how do we solve a problem? How do we come up with that price? What's the minimum price we should charge if the customer don't give us a price? What's the minimum price we should charge? Before we look at this situation what's the minimum price we should charge? I would like to remind you whether you are a student or a CPA candidate most likely that this is who you are if you're watching I would like to remind you to visit barhatlectures.com it's going to help you with your CPA exam preparation and your accounting courses and or invest in yourself invest in your career. My resources are a great supplement great supplement to your education. If you have not connected with me on LinkedIn please do so like this recording share it with other if it's helping you it might help other connect with me on Instagram Facebook Twitter and Reddit. So let's assume we are selling those power banks we are producing them and selling them and Adam ordinarily sell each power bank for $50. The cost for Adam company is as follow $10 of variable production cost $18 per unit fixed production cost one $1 of variable selling cost the customer came and requested a special price a special order for 10 000 of those power banks but they wanted their logo to be imprinted on the on the power bank so it's not only they want the power bank they want their logo to be imprinted no selling cost is required obviously so basically there is no selling cost the customer came to us but we have to purchase an imprinting machine because we need to imprint on the case the name of the company so simply put what's the minimum price that we should charge this customer well what do we have to take into account well we have to take into account the variable production cost if they're asking for 10 000 unit it's gonna it's gonna cost us $10 of variable production cost that's gonna be $100 000 also we have to take into account we have to recover the $50 000 of the machine that we need to buy therefore we have a total cost of 150 000 if the customer is willing to buy 10 000 unit the price should be around anything above $15 will give us incremental revenue so if they if we can sell them for $16 we make a dollar per piece and this is what we buy incremental revenue should be greater than incremental cost what should you now to learn about practice and learn about whether to accept or reject those special orders go to farhatlectures.com work multiple choice through false exercises that's gonna help you do better invest in yourself invest in your career good luck study hard and of course stay safe