Question

suppose, your company typically charges $150 per pair of shoes sold. You have received an order from a foreign distributor to buy 10,000 pairs at $95 per pair. Should you accept this new order? How do you decide? What is the decision rule to follow?

What are some quantitative and qualitative factors that should be considered?

Answer 1

As per decision making process rule an order is accepted only if it results in positive net operating income, since this order of 10,000 pairs at less than normal selling price of $95 will be accepted if it has a positive net income from this order i.e. its total revenue exceeds its total variable cost and fixed cost specific to the order, this order will be accepted only if its total variable cost and specific fixed cost is less than its total revenue i.e. (10000 x $95) = $950,000, another factor is capacity of production and sales demand in local market, if the company is capable to sale 100% of its production at $150, then it will be reluctant to sale at low price and it will reject the order.

Some quantitative and qualitative factors:

1 Effects on local market price, if there is no effect on sale price in local market then it can think of foreign order.

2 Order Iteration, Whether order is one time or will be repetitive in future.

3 Availability of raw material for production.

4 Existing extra capacity to fulfill the order

5 Any specific sales or shipping cost required for the order