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ACCA Applied Skills · Performance Management · Make-or-buy and other short-term decisions

Marlow Co makes component K at a variable cost of $14 per unit and a fixed overhead absorption of $6 per unit. Fixed costs would continue unchanged if production stopped. A supplier offers K at $18 per unit. Spare capacity has no alternative use. Which statement is correct per unit?

Marlow should make the component because only the avoidable variable cost of $14 per unit is relevant. The $6 fixed overhead continues whether it makes or buys, so it is ignored. Buying at $18 would cost $4 more per unit than making.

  1. AMake, because the relevant cost of making is $14 against $18 to buyCorrect
  2. BBuy, because the full cost of making is $20 against $18 to buy
  3. CBuy, because the supplier price is below total cost including fixed overhead of $6
  4. DMake, because the relevant cost of making is $20 against $18 to buy

Explanation

Fixed overhead is unavoidable so it is not relevant. Relevant cost of making is $14 per unit, which is less than $18 to buy. Using the full cost of $20 would wrongly suggest buying.

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