In a make or buy decision, management should consider which of the following factors?

• A. Only the sunk costs incurred in previous periods
• B. The relevant costs and opportunity costs associated with making versus buying
• C. The preferences of individual employees
• D. The historical cost of equipment used in production

Answer: (B)

Verified step by step guidance

1. Understand the concept of a make or buy decision: it involves choosing whether to produce a good or service internally (make) or to purchase it from an external supplier (buy).
2. Identify the types of costs relevant to this decision. Sunk costs, which are past costs that cannot be recovered, should be ignored because they do not affect future decisions.
3. Focus on relevant costs, which include the additional costs directly associated with making the product internally, such as materials, labor, and variable overhead.
4. Consider opportunity costs, which represent the benefits foregone by choosing one alternative over another. For example, using resources internally might mean losing the chance to use them elsewhere.
5. Exclude irrelevant factors such as employee preferences or historical costs of equipment, as these do not impact the incremental cost comparison between making and buying.