The below-list order: what one more unit really earns

1. Before you start

Contribution margin is the price of one unit minus the cost that unit causes — its variable cost. Sell a thing for $10 that costs $6 in materials and labour to make, and each one contributes $4 toward the fixed costs you pay no matter what, and then toward profit. That $4, not the full “loaded” cost, is what tells you whether one more sale is worth making.

Three honest statements before you start:

This is a Decide course. You read a situation, learn the idea, and make a call. You do not write or run any code.
The companies below, Fenwick Signs and Solstice Bakery, are composite — invented firms built from ordinary figures so the arithmetic is clean. No number is a claim about any real company.
This is not a certification. It proves, to you, that you can defend a special-order call.

You need only arithmetic. The hard part is judgment, not maths.

2. The Situation

Fenwick Signs stamps aluminium street and park signage. A city asks for 2,500 signs at $30 each — well below Fenwick’s $40 list price. The sales lead wants it: “the line has some slack and revenue is revenue.” The plant accountant refuses: “each sign fully costs us $37, so $30 loses us $7 a sign.” You have to make the call, and both of them are half-wrong.

The catch is that the deal can look profitable and destroy money, or look like a loss and add it — and which one is true turns on a single fact neither of them mentioned: how full the plant already is.

3. What you’ll be able to do

After this course you will be able to:

Compute a product’s contribution margin and use it — not full cost — to judge a special order.
Decide whether a below-list order adds or destroys profit, and name the number that flips the answer.
Spot when a plant is capacity-constrained, and price in the opportunity cost of the sales the order displaces.
Find the lowest price at which an order is still worth taking.

4. Prerequisites & time box

Prerequisites: arithmetic. Helpful but not required: the idea of fixed vs variable cost (covered in section 6). No spreadsheet, no accounting background.

Time box: about 16 minutes of reading (measured), plus your own thinking time on the call. That is under the 25-minute cap for a concept course.

Difficulty: 4 / 8 — a new-manager decision: a couple of interacting factors and one real judgment call, where the obvious answer is often the trap.

5. The case & where the numbers come from

Fenwick Signs is a composite manufacturer: its cost structure is built from ordinary figures a small metal-fabrication shop would recognise, chosen for clean arithmetic and not drawn from or claimed about any real firm. The definitions — fixed cost, variable cost, contribution margin, break-even, opportunity cost — are standard and cited in section 11. Every dollar below is an in-course assumption; every later number is computed from these.

Item	Figure
List price per sign	$40
Variable cost per sign (aluminium blank, ink, direct labour)	$22
Fixed cost per month (lease, salaried staff, machine depreciation)	$180,000
Normal monthly volume	12,000 signs
Plant capacity	12,500 signs / month
Special order	2,500 signs at $30 each

6. The Concepts

Contribution margin

Contribution margin is price minus the variable cost one unit causes. For a Fenwick sign at list: $40 − $22 = $18. That is what each normal sign throws off toward the $180,000 of fixed cost, and then toward profit. For the special-order sign at $30: $30 − $22 = $8. Still positive — each special sign does contribute $8 before any fixed cost. This is the number the accountant ignored by looking at “full cost,” and the number the sales lead was right to sense but never named.

(An interactive calculator sits here — enter a price, a variable cost, a fixed cost, current volume, and capacity, and it returns the contribution margin, the break-even volume, and the net profit effect of the order.)

Break-even volume

Break-even volume is the number of units whose contribution exactly covers fixed cost, so profit is zero: fixed cost ÷ contribution margin per unit. For Fenwick at list price: $180,000 ÷ $18 = 10,000 signs. Fenwick already sells 12,000 — so it is 2,000 signs past break-even, and its fixed cost is fully covered by normal business. That matters: once fixed cost is paid for, the only thing a new order changes is the contribution it adds or the contribution it displaces. Fixed cost is not part of the decision.

Full cost versus incremental cost

The accountant’s “$37 full cost” is variable cost $22 plus an allocated slice of fixed cost: $180,000 ÷ 12,000 = $15 a sign. But that $15 is an average of a cost Fenwick pays anyway — it is not caused by the next sign. Judging a one-off order against full cost double-counts fixed cost that is already covered (see break-even above). The cost that a special order actually causes is its variable cost — plus, if the plant is full, the contribution of whatever it displaces. Full cost is the right lens for long-run pricing of the whole product line; it is the wrong lens for an incremental order.

Opportunity cost and displacement

Here is the fact both sides missed: Fenwick’s capacity is 12,500 signs and it already makes 12,000, so it has only 500 signs of spare capacity. The city wants 2,500. So 500 special signs use idle time — but the other 2,000 displace normal $40 signs, each of which was earning $18 of contribution. The opportunity cost of those displaced sales is real money:

Contribution the order adds: 2,500 × $8 = $20,000.
Contribution given up on displaced normal signs: 2,000 × $18 = $36,000.
Net effect: $20,000 − $36,000 = −$16,000.

The order looks profitable — positive contribution, “some slack on the line” — and it destroys $16,000. Reject it at $30, or take only the 500 signs that fit in spare capacity, or negotiate a higher price. Had the plant been running at, say, 9,000 signs with 3,500 to spare, nothing would be displaced, and the same order would add $20,000. Same numbers, opposite call — and the fact that flips it is how full the plant already is.

7. Your Call

You have seen how contribution, break-even, and displacement decide Fenwick’s call. Now a different one lands on your desk.

Solstice Bakery wholesales artisan loaves to cafés — a different company in a different sector from Fenwick’s metal shop. It sells loaves at $6 each, with variable cost (flour, labour, packaging) of $3.50 and fixed cost of $30,000 a month. Its oven capacity is 20,000 loaves a month and it currently bakes 18,000. A grocery chain proposes a standing order of 4,000 loaves a month. Rather than a plain yes/no at one price, your job is to tell the owner the lowest price at which the order is worth taking — and whether the chain’s opening offer of $4.50 clears it.

How this differs from the taught case (the transfer): this is a different company and sector (a bakery selling food, not Fenwick’s sign manufacturing), the figures are different so the arithmetic must be redone, and it is a different kind of decision — you are setting a floor price for the order, not just accepting or rejecting one fixed price. The core concept is the same: contribution margin plus the opportunity cost of displaced sales decides the call.

8. Self-check

Before you write the memo, make sure you can say each of these in one line:

Why is “$30 is below our $37 full cost” the wrong test for a one-off order?
What single fact decides whether a below-list order adds or destroys profit?
How do you turn “how full is the plant” into a floor price for the order?

If any is fuzzy, reread section 6 — contribution, break-even, incremental cost, and displacement are the whole course.

9. Stretch

Push the decision further on your own:

Back at Fenwick: at what price would the full 2,500-sign order stop destroying value — covering both its variable cost and the contribution on the 2,000 displaced signs? (The genuinely harder one: the displaced 2,000 signs are fixed, so solve 2,500 × (P − $22) = 2,000 × $18.)
If Solstice could add a weekend shift that lifts capacity to 22,000 loaves at $600 of extra fixed cost, does the $4.50 offer become worth taking? What changed?
Write the one sentence you would say to a sales lead who insists “revenue is revenue.”

10. Ship it — your decision memo

Write a one-page memo to Solstice’s owner. State the call (do not accept the 4,000-loaf order at $4.50; the floor price is $4.75, because 2,000 normal loaves are displaced). Show the two-line arithmetic (added contribution $4,000 vs displaced contribution $5,000; floor = $3.50 + $1.25). Name what you rejected (judging the order on full cost; “positive contribution, take it”) and why. Name the one thing that would change your mind (real spare capacity, so nothing is displaced). Keep it to a single page an owner grasps in two minutes. This memo is your own argued claim — not a credential.

11. Sources

Fenwick Signs and Solstice Bakery, and every dollar figure attached to them, are composite and illustrative — constructed for clean teaching arithmetic, not drawn from or claimed about any real company. The concept definitions used to reason about them are standard; references below.

Concept / claim	Source (publisher)	URL	Accessed
Contribution margin = price − variable cost	Wikipedia — Contribution margin	https://en.wikipedia.org/wiki/Contribution_margin	2026-07-19
Break-even = fixed cost ÷ contribution margin	Wikipedia — Break-even point	https://en.wikipedia.org/wiki/Break-even_point	2026-07-19
Definition of a fixed cost	Wikipedia — Fixed cost	https://en.wikipedia.org/wiki/Fixed_cost	2026-07-19
Definition of a variable cost	Wikipedia — Variable cost	https://en.wikipedia.org/wiki/Variable_cost	2026-07-19
Opportunity cost of displaced production	Wikipedia — Opportunity cost	https://en.wikipedia.org/wiki/Opportunity_cost	2026-07-19

Next up

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