A company's approach to a make-or-buy decision:
A) Depends on whether the company is operating at or below the breakeven point.
B) Depends on whether the company is operating at or below normal volume.
C) Involves an analysis of avoidable costs.
D) Should utilize absorption (i.e., full) costing for inventory purposes.
E) Should consider an allocation of corporate headquarter expenses to the item in question.

Question

Quizplus · Accepted Answer

The company's approach to a make-or-buy decision should involve an analysis of avoidable costs, which are costs that can be eliminated if the company chooses to buy instead of make the product. By comparing the avoidable costs of making the product to the purchase price of the product, the company can determine which option is more cost-effective. The other choices are either irrelevant (A and B) or incorrect (D and E) in the context of a make-or-buy decision.

A Company's Approach to a Make-Or-Buy Decision