ECONOMICS

Detailed explanation-1: -If a company has excess capacity and present markets will not be affected, it would be profitable to accept an order at a special unit price even though the price is less than the unit variable cost to manufacture the item. A company should never accept an order for its product at less than its regular sales price.

Detailed explanation-2: -When deciding whether to accept a special order, management must consider several factors: The capacity required to fulfill the special order. Whether the price offered by the buyer will cover the cost of producing the products. The role of fixed costs in the analysis.

Detailed explanation-3: -It is always better to sell now rather than process further because of the time value of money. The basic decision rule in a sell or process further decision is: process further if the incremental revenue from processing exceeds the incremental processing costs.

Detailed explanation-4: -Incremental analysis is a true cost comparison. It does not account for sunk costs or previous costs associated with a product, employee or project. Relevant costs covered in an incremental analysis might include: Variable costs: These costs might change from option to option.

Detailed explanation-5: -A make-or-buy decision is an act of choosing between manufacturing a product in-house or purchasing it from an external supplier.