In a make-or-buy decision, what costs are relevant?

In a make-or-buy decision, what costs are relevant?

• A. Only fixed overhead costs.
• B. Incremental costs plus any opportunity costs; sunk costs are included.
• C. Incremental costs and any opportunity costs; sunk costs and fixed costs that do not change are irrelevant.
• D. Only direct materials.

Answer: (C)

In a make-or-buy decision, focus on costs that will actually differ between the two options. The relevant costs are incremental costs—the additional costs you would incur if you choose one option over the other—and any opportunity costs, which are the foregone benefits of the next best use of your resources. Sunk costs are costs already incurred and do not change with the decision, so they’re not relevant. Fixed costs that do not change with the decision are also irrelevant, since they’re incurred regardless of whether you make or buy. So the best answer is that the relevant costs are incremental costs plus any opportunity costs, with sunk costs and fixed costs that don’t change excluded.

In a make-or-buy decision, focus on costs that will actually differ between the two options. The relevant costs are incremental costs—the additional costs you would incur if you choose one option over the other—and any opportunity costs, which are the foregone benefits of the next best use of your resources. Sunk costs are costs already incurred and do not change with the decision, so they’re not relevant. Fixed costs that do not change with the decision are also irrelevant, since they’re incurred regardless of whether you make or buy. So the best answer is that the relevant costs are incremental costs plus any opportunity costs, with sunk costs and fixed costs that don’t change excluded.