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CS Professional · Goods and Services Tax (GST) and Corporate Tax Planning · Tax Planning and Managerial Decisions

In a make-or-buy decision, which of the following costs is ignored because it will be the same whether the company makes the component or buys it?

Fixed overhead that continues unchanged whether the company makes or buys is ignored, because make-or-buy decisions rely on relevant, incremental costs. Only costs that differ between the two alternatives affect the decision, and unavoidable fixed costs do not differ.

  1. ADirect material consumed only if the component is made
  2. BFixed overhead that continues unchanged in both alternativesCorrect
  3. CVariable labour saved if the component is bought
  4. DPurchase price payable to the outside supplier

Explanation

Only incremental (relevant) costs matter in a make-or-buy decision. Fixed overhead that stays the same under both options is not affected by the choice, so it is ignored. Material, labour saved and the purchase price all differ between the options and are relevant.

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