When pricing special orders, management can often approximate additional costs by the:

Question

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When pricing special orders, management can often approximate additional costs by the variable costs of making the product. Variable costs vary with the level of production, and therefore can provide a better estimate of the additional costs involved in producing a special order. Sunk costs (A) are irrelevant to the decision-making process, as they are costs that have already been incurred and cannot be recovered. Total costs (B) and fixed costs (C) are not good approximations for estimating additional costs because they do not vary with the level of production.

When Pricing Special Orders, Management Can Often Approximate Additional Costs