Relevant Costs 2

Question 1

what items should be considered relevant for a special order decision, if there is no excess capacity to fill the order?

Answer 1

Sales revenues, avoidable/variable costs of producing the order, and the opportunity cost of not providing the special order need to be considered.

Question 2

What items should be considered relevant for a make-or-buy decision?

Answer 2

Only avoidable costs (i.e., costs that go away when accepting the decision to buy) and any new revenues are relevant to the make or buy decision.

Question 3

What items should be considered relevant for a special order decision, if there is adequate excess capacity to fill the order?

Answer 3

If the special order can be completed using existing capacity, only sales revenues and the (avoidable) variable costs of producing the order need be considered.