- This topic has 5 replies, 3 voices, and was last updated 3 years ago by
.
- Posts
In make or buy decision which of the following is to be included in consideration
a) Redundancy payments to supervisor of product in question
b) Saved labour cost of production staff redirected to other work
Sir, a) is the correct ans and b) is wrong ans. Can you please explain me that why a) is correct and why b) is wrong?
a) is correct because the payment will only be made is they stop making the product themselves.
b) is not correct because they will still be paying the staff even if they stop making the product.
But Sir, in b) if the staff are redirected to our new project, we still have to pay the labour cost right. So the Relevant cost will be lost contribution+ labour cost. Then why the labour cost is not been considered as a relevant cost in b)
It is not the labour that is the relevant cost.
The relevant costs are the lost sales proceeds and the saved costs (apart from labour, which is not saved).
This will always be equal to the lost contribution plus the labour cost, but that it just arithmetic – it is not because the labour cost itself is a relevant cost.
- The topic ‘make or buy’ is closed to new replies.