Which one of the following does not affect a make-or-buy decision?
options: 1) variable manufacturing costs 2) opportunity costs 3) incremental revenue 4) direct labor costs
The correct answer and explanation is:
The correct answer is 3) incremental revenue.
Explanation:
A make-or-buy decision involves choosing whether to produce a good or service internally (make) or to purchase it from an external supplier (buy). The decision is primarily based on comparing relevant costs and benefits associated with both options.
- Variable manufacturing costs are costs that change with the level of production, such as materials and utilities. These costs directly impact the cost of making a product and are relevant in the make-or-buy decision because they affect the total cost if production is done internally.
- Opportunity costs represent the benefits lost when choosing one alternative over another. For example, if a company makes a part internally, it might lose the chance to use that production capacity for something else more profitable. Opportunity costs are relevant because they reflect potential foregone gains.
- Incremental revenue refers to additional revenue generated from selling more products or services. In a make-or-buy decision, the focus is on costs associated with producing or buying the product, not on the revenue generated by the product itself. Incremental revenue is not a factor because the quantity and sales price of the finished product are assumed constant; the decision is about how to source the input, not about increasing sales.
- Direct labor costs are the wages paid to workers directly involved in production. These costs are relevant because if the company decides to make the product, these costs must be considered; if the company buys the product, these labor costs may be avoided.
In summary, a make-or-buy decision evaluates relevant costs such as variable manufacturing costs, opportunity costs, and direct labor costs to find the most cost-effective choice. Incremental revenue does not affect this decision because it does not change whether the product is made internally or bought externally; it relates to sales volume or pricing rather than sourcing strategy.