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Learn: Contribution and Special Order Decisions
WJEC Eduqas GCE A LEVEL in BUSINESS specification
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Welcome!Welcome! You’ve already learned what special orders are. Today, we’ll build on that knowledge and explore how contribution helps businesses decide whether to accept special orders.
What is Contribution?Contribution is the amount each unit sold contributes towards covering fixed costs and generating profit. It is calculated by subtracting variable costs per unit from the selling price per unit.
Why is Contribution Important?Contribution is crucial because it helps businesses determine if a product or order is profitable. In special order decisions, businesses use contribution to check if accepting the order will cover costs and boost profits.
Quick check: How is contribution calculated?
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Special Order DecisionsA special order is when a business is asked to sell products at a lower price or under unique conditions. Businesses use contribution to decide whether accepting the order is worthwhile.
Key Factors in Special Order DecisionsWhen deciding whether to accept a special order, businesses should consider:Contribution per unitImpact on regular sales or customer expectationsAvailable capacity to fulfil the orderLong-term benefits, such as entering new markets
Contribution per unit is calculated by subtracting {{blank0}} costs from the {{blank1}} price.
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Match the items on the left with their correct pairs on the right
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Example: Deciding on a Special OrderImagine a company produces a product with a selling price of £10 and variable costs of £6. Contribution per unit is £4. If a customer offers to buy 500 units at £8 each, should the company accept?
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Review Time!Great job so far! Let’s test your understanding of contribution and special order decisions with a few final questions.
Which of the following are factors to consider when accepting a special order? (Select all that apply)
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What is the contribution per unit if selling price is £15 and variable costs are £10?
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A business should accept a special order if it generates a positive {{blank0}} and does not negatively affect {{blank1}} sales.
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