You just got your first job after graduation. Your immediate supervisor received a special order at a price that is "below cost" during your first week at the company. The supervisor points to the proposal and says, "These are the kinds of orders that will get you in trouble. Every sale must bear its share of the full costs of running the business. If we sell below our full cost, we'll be out of business in no time." You remember from your course in cost accounting that this may not be as much trouble as the supervisor anticipates. How would you respond and not lose your first job?

Question

What will be an ideal response?

Answer 1

Student answers will vary, but they should be logical and diplomatically state the facts. An example answer might be:
I agree with you that this is a somewhat complex decision. However, I learned in my cost accounting class that in the short run, sales revenues need only cover the differential costs of production and sale. But this is only from a short-run perspective and will work as long as the sale does not affect other output prices or normal sales volume. An occasional "below cost" sale proposal might actually result in a net increase in income, as long as the revenues cover the differential costs. In the long-run, you are correct. All costs must be covered or management would not want to reinvest in the same type of assets; continually selling below the full cost of production would not make sense for a particular product, especially when it comes time to replace the facilities used for these jobs. Additionally, there may be some qualitative issues to consider before considering a special order, like will the special order be seen by some of our customers as a cheaper substitute for our original product, causing lost sales of our regular customers.