Special order, capacity constraint and relevant costing at a poultry processor
Taraz Poultry LLP processes chicken. Monthly capacity is 200,000 kg. The June 2026 budget assumes production and sales of 180,000 kg at an average price of KZT 1,200 per kg. Variable processing cost is KZT 620 per kg; packaging and distribution cost is KZT 90 per kg; fixed overhead is KZT 48 million per month. A foreign retailer offers a one-off order for 30,000 kg at KZT 950 per kg, collected at the factory gate, so no packaging or distribution cost would be incurred. Accepting the order would require 10,000 kg to be displaced from regular sales because the plant is already near capacity; the displaced customers cannot be served later. The sales director argues that any price above variable cost is profitable and that the order will improve utilisation. The operations director notes that the order requires a special spice blend costing an extra KZT 40 per kg and overtime premium of KZT 6 million. The managing director asks for a relevant-cost analysis and a view on whether to accept, including non-financial factors.
1. Prepare a relevant-cost analysis for the special order and calculate the minimum acceptable price per kg. Show your workings and explain why each item is or is not relevant.
Read the worked answer
Regular contribution per kg = KZT 1,200 - 620 - 90 = KZT 490. Capacity is 200,000 kg, current demand is 180,000 kg and the order is 30,000 kg, so 10,000 kg of regular sales must be displaced.
Relevant costs of the order:
- Variable processing: 30,000 x 620 = KZT 18.6 million.
- Special spice blend: 30,000 x 40 = KZT 1.2 million.
- Overtime premium: KZT 6.0 million.
- Opportunity cost of displaced regular sales: 10,000 x 490 = KZT 4.9 million. Total relevant cost = KZT 30.7 million, or KZT 1,023.33 per kg.
The KZT 90 packaging and distribution cost is not relevant because it is avoided on this order. Fixed overhead of KZT 48 million is not relevant because it is incurred whether or not the order is accepted. The offer price of KZT 950 is below the relevant cost of KZT 1,023.33, so the order produces a shortfall of about KZT 2.2 million. The sales director's rule of thumb is wrong because it ignores the opportunity cost of scarce capacity and the incremental spice and overtime costs.
2. Advise the managing director whether to accept the order. Include two non-financial factors and one condition that would change your recommendation.
Read the worked answer
On the stated facts, reject the order. At KZT 950 per kg it does not cover the relevant cost of KZT 1,023.33 per kg, and accepting it would reduce monthly profit by about KZT 2.2 million. The fact that the price exceeds cash variable cost is not enough when capacity is constrained and regular sales must be displaced.
Non-financial factors include: (1) the risk of damaging relationships with regular customers if they learn that a lower-priced export order is being supplied while they pay KZT 1,200; and (2) operational risk from overtime, including quality problems, employee fatigue and food-safety compliance. A strategic entry into a new export market may have option value, but that needs a separate business case and should not be disguised as a profitable order.
The recommendation would change if the displaced regular sales could be served later or if additional capacity could be rented at a cost below the lost contribution. For example, if the 10,000 kg displacement could be avoided, the relevant cost would fall to about KZT 860 per kg (660 variable plus 200 overtime per kg), and the order would generate a positive contribution. The managing director should also check whether the overtime premium is avoidable and whether the spice cost is a one-off or will recur.