Marginal costing

Decision Making: Make or Buy

Scenario: should the firm produce a component internally or purchase it from an external supplier?

Decision rule: compare variable (marginal) cost of making with the buy-in price — fixed costs are irrelevant (they remain regardless of the decision)

• Variable cost of making < Buy-in price → continue making
• Buy-in price < Variable cost of making → buy in

Example — Harvey Z-Wings:

• VC of making = £8.10 (labour £4.30 + materials £3.80)
• Buy-in price = £8.80
• Saving by making = £0.70 per unit → reject offer, continue making

For/Against considerations:

See Section 10 for the IPFCR written report structure.