Difficulty: Intermediate
Prerequisites: Basic understanding of cost classifications (variable vs. fixed), contribution margin, and cost-volume-profit relationships. Chapter coverage of manufacturing cost categories (direct materials, direct labour, manufacturing overhead) and the distinction between manufacturing and nonmanufacturing costs.
This case sits within the "relevant costs for decision-making" unit of managerial/cost accounting. The core skill here is learning to separate costs that matter for a specific decision from costs that do not, then using only the relevant ones to evaluate a short-term opportunity. You need this every time a business faces a one-off pricing decision, a make-or-buy choice, or any situation where sunk and committed costs tempt you into bad reasoning. If you are comfortable with variable vs. fixed cost behaviour and basic contribution margin analysis, you are ready for this material.
A printing business running at full capacity receives a special order at a steep discount. The decision hinges on whether the order's revenue covers only the variable (relevant) costs, not the full cost per unit. It does: $0.10 revenue per copy vs. $0.06 in relevant costs. Making in-house beats outsourcing ($0.06 vs. $0.08), but qualitative factors, such as the lack of future business from this client, also matter.
Relevant costs
Costs that differ between alternatives in a decision and will be incurred in the future. Only these costs should influence the choice.
In simple terms, this means: if a cost changes depending on which option you pick, it counts. If it stays the same either way, ignore it.
Irrelevant costs
Costs that do not differ between decision alternatives, including sunk costs and committed fixed costs. These should be excluded from the analysis.
Think of it as: money you are going to spend regardless of your decision. It has no bearing on which path is better.
Special order
A one-time order from a customer at a price below the company's normal selling price. Evaluated on the basis of relevant costs only, not full cost.
In simple terms, this means: a side deal at a discount that you would not normally accept if you looked at full average cost per unit.
Variable costs
Costs that change in total in direct proportion to changes in activity volume. In this case: direct materials, direct labour, and variable manufacturing overhead.
Think of it as: costs that only exist because you made or sold one more unit.
Fixed costs
Costs that remain constant in total regardless of changes in activity volume within the relevant range. These are irrelevant to a special order decision when the company has available capacity or when the costs are already committed.
Make-or-buy decision
The choice between producing a product or component internally versus purchasing it from an external supplier. Decided by comparing in-house variable costs with the outsource price.
In simple terms, this means: should you do the work yourself or pay someone else to do it?
Qualitative factors
Non-financial considerations that may influence a decision, such as customer relationships, future business potential, reputation, and strategic fit.
Think of it as: the things the numbers cannot capture but that still matter to the long-term health of the business.
The owner runs a printing business at full capacity: 150,000 copies per month.
Normal pricing: $17 per 100 copies ($0.17 per copy).
A potential client offers $10 per 100 copies ($0.10 per copy), well below normal price.
The client is unlikely to bring future business.
The owner must decide: (1) accept or reject the order, and (2) if accepted, make in-house or outsource.
Relevant costs are the variable manufacturing costs that change with the decision:
Direct materials (variable): $0.04 per copy
Direct labour (variable): $0.01 per copy
Manufacturing overhead, variable portion: $0.01 per copy
Irrelevant costs are those that remain unchanged regardless of the decision:
All fixed costs (already committed, do not change with this order)
Sales commission (variable nonmanufacturing cost), because the owner will not pay a sales representative on this deal
Total relevant cost per copy: $0.06
Revenue per copy from the special order: $10 / 100 = $0.10
Relevant cost per copy: $0.06
Since $0.06 < $0.10, each copy contributes $0.04 toward covering fixed costs and profit.
The order is profitable on a relevant-cost basis, even though the price is far below the normal $0.17.
In-house variable cost per copy: $0.06
Outsource cost: $8 per 100 copies = $0.08 per copy
Since $0.06 < $0.08, it is cheaper to produce in-house.
The owner should make the copies himself if he accepts the order.
The client is unlikely to generate repeat business, which reduces the strategic value of accepting.
Taking a low-margin order at full capacity means displacing higher-margin work, or stretching resources.
The owner should weigh whether his capacity could be used for a more profitable opportunity.
Reputation effects: consistently accepting below-market pricing can signal desperation or erode pricing power with other clients.
Relevant cost per unit = Sum of all variable costs that change with the decision
For FinePrint: $0.04 + $0.01 + $0.01 = $0.06 per copy
Contribution per unit on special order = Special order price per unit - Relevant cost per unit
For FinePrint: $0.10 - $0.06 = $0.04 per copy
Decision rule: Accept the special order if the special order price exceeds the relevant cost per unit. Reject if it does not.
Make-or-buy rule: Choose the option with the lower cost. Compare in-house variable cost ($0.06) against the outsource quote ($0.08). In-house wins by $0.02 per copy.
This is exactly the kind of analysis a hotel runs when deciding whether to sell remaining rooms at a deep discount through a last-minute booking app. The room's fixed costs (mortgage, insurance, housekeeping salaries) exist whether the room is sold or not; only the variable costs of one more guest (laundry, toiletries, electricity) matter.
Manufacturers face the same logic when a retailer asks for a private-label run at a price below the brand's normal wholesale. If the variable cost is covered and there is spare capacity, the order adds to profit even at the lower price.
Students often think that any price below full cost per unit is automatically unprofitable. It is not. Full cost includes allocated fixed costs that do not change with the decision. Only relevant (variable, incremental) costs determine short-run profitability.
Students frequently include fixed costs in special order analysis. Fixed costs are irrelevant here because they are incurred regardless of whether the order is accepted.
A common error is including all variable costs without checking which ones actually apply to this specific order. In this case, the sales commission (a variable nonmanufacturing cost) does not apply because no salesperson is involved in the deal.
Students sometimes confuse the outsource price with a cost saving. Outsourcing costs $0.08 per copy vs. $0.06 in-house. Outsourcing is more expensive here, not less.
⚠️ Expect exam questions that give you a full cost breakdown and ask whether to accept a special order. The trap is including fixed costs in your analysis. Strip them out.
⚠️ Make-or-buy questions frequently appear alongside special order problems. You must compare only the relevant in-house costs against the outsource quote, not the full absorption cost.
⚠️ Qualitative factors are a common short-answer or essay component. Be ready to name at least two (future business potential, capacity constraints, reputation, opportunity cost of displaced work).
⚠️ Watch for the detail about sales commissions or other variable nonmanufacturing costs that do not apply to a given order. Exams test whether you can identify which variable costs are truly relevant to the specific decision at hand.
True or False: Fixed costs should be included when evaluating a special order. (Answer: False)
Fill in the blank: The total relevant cost per copy for FinePrint is $______. (Answer: $0.06)
True or False: If the special order price exceeds the relevant cost per unit, the order adds to profit. (Answer: True)
True or False: Outsourcing is always cheaper than producing in-house. (Answer: False)
Fill in the blank: The contribution per copy on FinePrint's special order is $______. (Answer: $0.04)
Q: Why are fixed costs excluded from the special order analysis in this case?
A: Fixed costs do not change regardless of whether the special order is accepted or rejected. They are already committed and will be incurred either way. Only costs that differ between the two alternatives (accept vs. reject) are relevant.
Q: The special order price is $0.10 per copy and the normal price is $0.17 per copy. Why might the owner still accept the order?
A: Because the relevant cost per copy is only $0.06. The special order price of $0.10 exceeds the relevant cost by $0.04 per copy, meaning each copy sold contributes $0.04 to profit. The normal price is irrelevant to this specific decision.
Q: Why is the sales commission excluded from the relevant cost calculation even though it is a variable cost?
A: The sales commission is a variable nonmanufacturing cost, but it does not apply to this order because the owner will not be paying a sales representative for this particular deal. A cost must actually change with the decision to be relevant.
Q: Should the owner outsource the special order to the smaller printing shop? Explain with numbers.
A: No. The in-house variable cost is $0.06 per copy. The outsource cost is $0.08 per copy ($8 per 100 copies). Producing in-house saves $0.02 per copy, so the owner should make the copies himself.
Q: Name two qualitative factors the owner should consider before accepting this special order.
A: (1) The client is unlikely to bring future business, reducing the strategic value of accepting a discounted order. (2) At full capacity, taking this low-margin order may displace higher-margin work or stretch resources, creating an opportunity cost.
This connects directly to contribution margin analysis: the $0.04 per-copy contribution on the special order is the same concept as contribution margin per unit in CVP analysis, just applied to a one-off decision rather than ongoing operations.
The make-or-buy element links to outsourcing and insourcing decisions covered later in most managerial accounting courses. The same relevant-cost framework applies: compare only the costs that differ between alternatives.
The capacity constraint mentioned in the case (150,000 copies per month at full capacity) foreshadows the theory of constraints and bottleneck analysis. If the owner is truly at full capacity, accepting this order means turning away regular work, which introduces opportunity cost, a concept typically covered in the same chapter or the next.
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