Relevant costs in a make-or-buy decision of a part include: A. setup overhead for the manufacture of the product using the outsourced part B. currently used manufacturing capacity that has alternative uses C. annual plant insurance costs that will remain the same D. corporate office costs that will be allocated differently

Question

Rylee

Business

17 October, 15:04

Relevant costs in a make-or-buy decision of a part include: A. setup overhead for the manufacture of the product using the outsourced part B. currently used manufacturing capacity that has alternative uses C. annual plant insurance costs that will remain the same D. corporate office costs that will be allocated differently

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Kristen Mccullough · Answer 1

B. Currently used manufacturing capacity that has alternative uses

Explanation:

Make or buy decision is the process involved in determining whether to produce a product in house or purchase it from an external supplier.

Manufacturing Capacity is described as the production capability of an object in a manufacturing process. The object could be an operator, a machine or even a work center. Every resource in a manufacturing process has its determinable capacity and this is a relevant cost to consider when determing whether to produce or buy a product.

Looking at the definition, it is clear that current capacity of manufacturing with alternative uses is important. In other words, it is very crucial to be able to determine the cost of using the current manufacturing capacity to either make the product in house and then weigh this cost against the cost of using the same manufacturing capacity to manufacture an alternate product.

It stands to reason, (although other costs are weighed) that the product production (current or alternate) that can be manufactured at a lesser cost should be chosen and this is a very crucial decision in a make-or-buy decision.

Looking at the other options, the golden rule is that any cost that is not a direct cost to the manufactur of a product in house or its outsourcing should be ignored in making the decision.