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Dear sir,
I do have watched your lectures on make or buy but still has some issues.-When we make a decision, we should compare the marginal cost of making and the marginal cost of buying.
-But in an old exam question, it says “Machine costs are semi variable; the variable element relates to set up cost, which are based upon the number of batches made. K has a fixed cost of $4000 and D a fixed cost of $6000. Whilst both components are currently made in batches of 500, this would need to change, with immediate effect, to batches 400.”
-The FC have been included when calcuating the total variable costs.
-My question is that why the FC has been included? Although the FC is specific, our objective is to compare the marginal costs of buying and making.
Thanks.
To give you a complete answer you would have to tell me which question you are referring to.
However, if fixed costs are specific, then if a product is stopped or a division is closed (because of buying externally instead of making it ourselves) then it means those fixed costs will be saved and therefore do need taking into account when making the decision as to whether or not to close.
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