- This topic has 1 reply, 2 voices, and was last updated 4 weeks ago by
.
- Posts
- June 5, 2020 at 1:53 pm
Sir the textbook says that when making make vs buy decision only marginal costs of production are to be compared with purchase price. Now my doubt is why do we not include fixed production overheads also in ‘making costs’? afterall the machine would not need cleaning materials, the supervisor would not be needed nor the factory guard, so these kinds of fixed production overheads would be eliminated (if we decide to buy) like all other marginal costs of production.
June 5, 2020 at 4:49 pmUnless your textbook has expanded on that statement it is not correct.
If there is a saving in fixed overheads as a result of buying instead of making, then certainly we take it into account. In an exam question it depends on what other information is given – if, for example, they are making lots of other products then we would assume fixed overheads in total remain the same whether one of the products is made or bought (unless obviously the question specifically said differently).
You must be logged in to reply to this topic.