Here, the relevant items are the incremental revenue ($26 per unit) and the
variable cost ($24 per unit), giving a contribution margin of $2 per unit. Fixed costs
(manufacturing, selling, administrative) are not relevant because they do not
change with the order, and any allocated fixed cost per unit is irrelevant for decisionmaking.
When there is no spare capacity, accepting the special order means sacrificing
regular sales. In this case, we must consider the opportunity cost, i.e., the
contribution margin lost from regular customers.
If no spare capacity exists, the key conditions to evaluate are: (1) whether the special
order price covers full incremental cost including opportunity cost, (2) whether it
affects regular market price or customer relationships.