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Discussion

In a make-or-buy decision the relevant cost of making is the

  • A.variable cost alone in every case
  • B.purchase price offered by the supplier
  • C.variable cost plus any fixed cost that making adds
  • D.full absorbed cost including all overhead

Answer: C

Overhead that continues whether or not the item is made in-house is irrelevant, but any additional fixed cost caused by making it is not. Using the full absorbed cost is the commonest error and biases the decision toward buying.

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