110 Understanding the Numbers
Fifty dollars a book for 5,000 books was their offer to me. Since we just went
over the numbers, I said I couldn’t possibly do this since our variable costs
alone were greater than $50 a unit. This analysis we did does help with decision
making. Last year I might have agreed to the deal. I am starting to feel like a
businessperson.”
Stephen asked whether the PBS group accepted her decision. When
Abbey said that they were very persistent and would call back next week,
Stephen suggested he and Abbey meet again for lunch. He needed to review
some of his class notes on relevant cost analysis,specifically on something he
remembered as “special orders.”
At lunch Stephen explained some analysis he had done. “Abbey, this is
called a special order situation. These types of business decisions are short-
run decisions that have no long-term ramifications.^4 Assuming that we have
the Web site up by that time, we have to be careful in identifying only those
costs that are relevant to the decision. For instance, the $100,000 we will
spend on our site per year is not relevant, since regardless of whether we ac-
cept this special order, those costs will still be there. The rule that we use is:
A cost is relevant if and only if it will change due to the decision being ana-
lyzed, in this case our special order. Let’s review the relevant costs. First,
there’s the $35 charge to print the books on demand. Since this is a 5,000-unit
order the printer ’s costs to prepare the run, called set-up costs, will be spread
over a much larger number of books. I talked with him, and he would be will-
ing to do this run for $30 per book. Likewise, UPS or FedEx will ship these
books all at once and not individually, so the $10 charge per book will be
avoided. A one-time fixed charge of $250 for shipment of the 5,000-book
order is closer to the correct number. Since this order was not sold through a
EXHIBIT 3.7 Relevant cost analysis of special order.
Accept the
Order, No Accept the
Adjustments Order, Reject the
to Costs Adjusted Costs Order DifferenceNumber of books sold 5,000 5,000 0 5,000
Revenue $250,000 $250,000 $ 0 $250,000
Relevant costs:
Printing $175,000 $150,000 $ 0 $150,000
Logistics 50,000 250 0 250
10% site referral 25,000 0 0 0
5% Web site expense 12,500 12,500 0 12,500
Total relevant costs $262,500 $162,750 $ 0 $162,750
Nonrelevant costs
Web site design $100,000 $100,000 $100,000 $ 0
Profit from order $ 87,250