If a special order increases total revenue and reduces average cost, which response is most consistent with typical decision-making guidance?

If a special order increases total revenue and reduces average cost, which response is most consistent with typical decision-making guidance?

• A. The order should always be accepted if it yields incremental profit.
• B. Marketing and management will want to accept the order.
• C. The company should ignore the effect on existing customers.
• D. The firm should immediately expand capacity

Answer: (B)

When a special order raises total revenue and lowers average cost, the incremental profit from that order tends to be positive and the contribution margin improves, especially if there is unused or easily usable capacity. In typical decision-making, marketing and management would push to accept such an order because it directly increases profitability and makes better use of resources, provided there are no hidden downsides like harming existing customers or undermining long-term pricing. Expanding capacity immediately isn’t automatically warranted by a single favorable order; that step depends on sustained demand and the cost of expansion. Ignoring the effect on existing customers isn’t consistent with prudent decision-making, since any capacity or pricing changes could affect current sales.

When a special order raises total revenue and lowers average cost, the incremental profit from that order tends to be positive and the contribution margin improves, especially if there is unused or easily usable capacity. In typical decision-making, marketing and management would push to accept such an order because it directly increases profitability and makes better use of resources, provided there are no hidden downsides like harming existing customers or undermining long-term pricing. Expanding capacity immediately isn’t automatically warranted by a single favorable order; that step depends on sustained demand and the cost of expansion. Ignoring the effect on existing customers isn’t consistent with prudent decision-making, since any capacity or pricing changes could affect current sales.