Page 253 - BA2 Integrated Workbook STUDENT 2018

Short-term decision making

Make or buy decisions

Businesses may be faced with the decision about whether to make components or
products themselves (in-house) or to obtain these from outside suppliers.

An item should be made in-house only if the relevant cost of making the product in-
house is less than the cost of buying the product externally.

If spare capacity exists:

The relevant cost of making the product in-house = the variable cost of internal
manufacture plus any fixed costs directly related to that product.

If no spare capacity exists:

The relevant cost of making the product in-house = the variable cost of internal
manufacture plus any fixed costs directly related to that product plus the opportunity
cost of internal manufacture (e.g. lost contribution from another product).

Illustrations and further practice

Go through illustration 7

Try TYU 13

247