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John Moffat.
John Moffat.-
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adarsh1997
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Hi!
I actually do have watched your lectures but still has some issues concerning make or buy.
When we need to decide whether we should make in house or sub-contract production, we should compare the marginal cost of making v/s the marginal cost of buying externally.
However if we have some specific fixed cost, what should we do?
1. Should we only compare the variable cost of making to the variable cost of buying OR
2. Should we compare the (variable cost + specific fixed cost) of making to the variable cost of buying?Thanks.
John Moffat
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If there is a specific fixed cost then this will be saved if we sub-contract instead of making in-house. So you compare the saved fixed cost with the extra marginal cost of sub-contracting.
adarsh1997
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Therefore, the rule is that we compare the variable cost+ specific fixed cost of making with the marginal cost of buying.
Thanks.
John Moffat
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Yes – although be careful about just learning rules. The examiner is very clever at putting ‘tricks’ in questions to test that you understand as opposed to having just learned rules.
adarsh1997
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