Learn: Calculating Contribution for a Special Order

Welcome!You've already learned about special orders and how contribution is used in decision-making. Today, we'll build on that foundation and focus on how to calculate contribution for a special order.

What is Contribution?Contribution refers to the amount remaining from sales revenue after covering variable costs. It helps businesses determine whether a product or service contributes enough to cover fixed costs and generate profit.

Why is Contribution Important in Special Orders?Special orders often involve unique pricing or conditions. Calculating contribution ensures the business can decide whether accepting the order will benefit or harm profitability. It helps assess the financial impact of unusual orders.

Steps to Calculate Contribution for a Special OrderTo calculate contribution for a special order, follow these steps:Calculate the sales revenue for the special order.Identify the variable costs associated with producing the order.Subtract the variable costs from the sales revenue to find the contribution.

Factors to ConsiderWhen deciding whether to accept a special order, businesses must also consider additional factors such as:Capacity: Does the business have enough resources to fulfil the order?Impact on existing customers: Will taking the order affect regular customers?Long-term benefits: Could the order lead to future opportunities like repeat business?

Break-even and ContributionContribution also plays a role in break-even analysis. By comparing total contribution against fixed costs, businesses can determine how many units need to be sold to cover all costs.

Review Time!Great work! You've learned how to calculate contribution for a special order and why it matters. Let’s test your understanding with a few final questions.