Chapter 6 - Make Or Buy And Other Short Term Decisions

Question 0

The replacing cost of labour

Answer 0

Labour
1. Spare capacity.
Relevant cost = Nil

1. Full capacity - Can hire more labour (take on extra staff or pay overtime).
   Relevant cost = Extra cost of labour
2. Full capacity - Can’t hire more labour.
   Relevant cost = Opportunity cost of diverting labour, i.e. Lost contribution and extra labour cost.

Question 1

The relevant cost of materials

Answer 1

Material
1. In stock - In regular use and will be replaced.
Relevant cost = current purchase price
2. In stock - Will not be replaced.
Relevant cost = The opportunity cost e.g. Lost scrap value or lost contribution if use material here instead if elsewhere

1. Out of stock
   Relevant cost = Current purchase price

Any historic cost is always a sunk cost and never relevant.

Question 2

Make vs Buy

Answer 2

Spare capacity exists:
The relevant cost of making the product in house = The variable cost of internal manufacture plus any fixed costs directly related to that product.

No spare capacity exists:
The relevant cost of making the product in house = The variable cost of internal manufacture plus any fixed costs directly related to that product plus the opportunity cost of internal manufacture (e.g lost contribution form another product).