When evaluating a special order, the manufacturer must determine if accepting it will be profitable without disrupting normal operations. The key consideration is whether the company has spare production capacity to handle the order without increasing fixed costs.
Correct Answer (B - The Manufacturer Can Fulfill the Order Without Expanding Production Facilities)
Fixed costs ($3 per unit) are already incurred and will not change if the order is accepted.
The special price ($7 per unit) covers the variable costs ($5 per unit), contributing $2 per unit to profit.
If the manufacturer has excess production capacity, the order is profitable.
The IIA Practice Guide: Auditing Financial Performance emphasizes that special order decisions should be based on incremental cost analysis, ensuring no need for capacity expansion.
Why Other Options Are Incorrect:
Option A (Fixed and Variable Manufacturing Costs Are Less Than the Special Offer Selling Price):
Fixed costs should not be considered in short-term pricing decisions if they are already incurred.
Option C (Costs Related to Accepting This Offer Can Be Absorbed Through the Sale of Other Products):
The decision should be based on whether the order is profitable on its own, not relying on other products.
Option D (The Manufacturer’s Production Facilities Are Operating at Full Capacity):
If the company is at full capacity, accepting the order would require sacrificing existing sales or expanding capacity, which increases costs.
IIA Practice Guide: Auditing Financial Performance – Discusses cost analysis for special pricing decisions.
IIA GTAG 13: Business Performance – Covers incremental cost and profitability analysis in pricing decisions.
Step-by-Step Explanation:IIA References for Validation:Thus, B is the correct answer because accepting the order is only profitable if the manufacturer has excess capacity.
