Final answer:
Accepting a special order below the current selling price can be beneficial when variable costs are covered, the contribution margin is positive, and the order facilitates market expansion, although covering fixed costs alone is not a decisive factor.
Step-by-step explanation:
When there is an excess capacity, accepting a one-time-only special order for less than the current selling price can be sensible if certain financial conditions are met. Specifically:
- The variable costs are covered, which means that the revenue from the order exceeds the variable costs associated with producing the goods or services.
- The contribution margin is positive, indicating that after variable costs are subtracted from sales revenue, there is a surplus to contribute towards fixed costs and potential profit.
- The order aids in market expansion, providing strategic value beyond immediate financial gain, potentially leading to future business opportunities and higher long-term profitability.
While covering fixed costs can be a factor, it is not a necessary condition for accepting a special order as fixed costs do not change with the level of production or sales in the short run. The decision to accept the special order should be based on evaluating whether the price covers the additional variable costs and if the order could lead to long-term strategic advantages.
It is important to note that each option should be carefully assessed in the context of the firm's overall business position and long-term strategic goals.