Q25-13RQ - Horngren'S Financial And Managerial Accounting

Question

What questions should managers answer when considering special pricing orders?

Step-by-Step Solution

Answer

Answer

Managers must consider several factors, such as capacity required, qualitative factors, fixed costs, and more, before considering special pricing orders.

Step-by-Step Solution Step 1: Meaning of Special Orders

Special orders refer to orders placed at lower prices to a business entity. Such orders are generally awarded for a short period of time; and in the short term, do not affect the normal sale of the business.

Step 2: Questions managers should answer when considering special pricing orders

Managers are required to consider the following points when making decisions associated with special orders:

• Capacity required for the fulfillment of special orders must be considered.
• Managers should check whether the price offered by the buyer covers the cost of production.
• Fixed costs’ role should be properly analyzed to determine the appropriateness of special pricing orders.
• In addition, other qualitative factors should also be considered while concluding the analysis.