Question

Greece Inc. has excess capacity. Under what situations should the company accept a special order for less than the current selling price?
a) When additional fixed costs must be incurred to accommodate the order

b) Never

c) When the company thinks it can use the cheaper materials without the customer's knowledge

d) When incremental revenues exceed incremental costs

Answer 1

Answer:

D) When incremental revenues exceed incremental costs

Explanation:

Incremental revenues are the additional revenues generated by selling additional units, or in this case an special order. Incremental costs are the additional costs generated by accepting the special order.

Generally when a special order is being considered, the company must first determine if the additional output is possible with the current capacity, and if so, which additional costs would apply to the special order. Generally certain fixed costs are not included in the cost analysis of special orders, and only variable costs are used to determine if it generates profits or not.