Make-or-buy decision prefers buying when the outside price is:
AEqual to marginal cost
BAbove marginal cost of in-house
CBelow marginal cost of in-house
DHigher than total cost
Answer & Solution
Correct answer: C. Below marginal cost of in-house
1. In a make-or-buy decision, the relevant comparison is the outside price against the in-house marginal (variable) cost.
2. Fixed cost is irrelevant if it is unavoidable.
3. If the outside price is below in-house marginal cost, buying is cheaper.
4. Hence buying is preferred when outside price is below in-house marginal cost.
_Source: ICAI BoS Inter Paper 3, Ch 14 "Marginal Costing", §14.9.1 ¶2_
Related questions
At the break-even point,A higher contribution to sales ratio implies thatIf the margin of safety is 21.875 per cent of sales, break-even sales are what share of saMargin of safety isFixed cost is 1,50,000 and contribution per unit is 15. Units needed to earn a profit of 2Fixed cost is 1,50,000 and contribution per unit is 15. The break-even point in units isSelling price is 30 per unit and variable cost is 15 per unit. The P/V ratio isContribution is defined as