A2CM-L11 — Make or Buy Decisions

Understanding how businesses use relevant costing to decide whether products or components should be manufactured internally or purchased from external suppliers.

Learning Objectives

By the end of this lesson students should be able to:

• understand make or buy decisions

• identify relevant costs

• compare internal and external costs

• incorporate opportunity costs

• recommend appropriate decisions

• answer examination-style questions

Concept Framework

What is a Make or Buy Decision?

A make or buy decision involves choosing between:

• manufacturing a product internally

• purchasing it from an external supplier

The objective is to select the option that provides the greatest financial benefit to the business.

Why are Make or Buy Decisions Important?

Businesses use make or buy analysis to:

• reduce costs

• improve efficiency

• focus on core activities

• improve resource utilisation

• maximise profitability

CORE TERMINOLOGY - TERM , MEANING & KEY RULES

Term	Meaning
Make	Produce internally
Buy	Purchase externally
Relevant Cost	Cost affected by the decision
Opportunity Cost	Benefit sacrificed by choosing one option
Outsourcing	Using an external supplier

Compare:

Relevant Cost of Making

with

Relevant Cost of Buying

Choose the option with the lower relevant cost.

DECISION-MAKING PROCESS

Step 1

Identify the component or product.

Step 2

Calculate relevant costs of internal production.

Step 3

Calculate external purchase costs.

Step 4

Include opportunity costs if applicable.

Step 5

Select the lower-cost alternative.

QUALITATIVE FACTORS

Financial Factors

✓ Cost savings

✓ Resource utilisation

✓ Profitability impact

✓ Opportunity costs

Non-Financial Factors

✓ Supplier reliability

✓ Product quality

✓ Confidentiality concerns

✓ Delivery schedules

✓ Employee morale

✓ Long-term strategic objectives

📌 Make or Buy Decisions are frequently examined alongside relevant costing and opportunity cost analysis. Students should master: ✓ Relevant Cost Identification ✓ Opportunity Cost Inclusion ✓ Outsourcing Decisions ✓ Cost Comparisons ✓ Management Recommendations 🎥 Full worked examples are available in the YouTube Learning Library. 📩 Students may submit make-or-buy decision doubts through the Student Doubt Support facility.

WORKED EXAMPLES

Example 1 — Basic Make or BuyCost to Make:
£40 per unit

Cost to Buy:
£35 per unit

Decision:

Buy externally

Savings:

£5 per unit

Example 2 — Opportunity Cost IncludedManufacturing Cost:
£25,000

Opportunity Cost:
£8,000

Total Relevant Cost:

£33,000

Supplier Price:

£30,000

Decision:

Buy externally

Example 3 — Internal Production PreferredRelevant Cost to Make:
£18,000

Cost to Buy:
£24,000

Decision:

Make internally

Savings:

£6,000

📌 Make or Buy Decisions are frequently examined alongside relevant costing and opportunity cost analysis.

Students should master:

✓ Relevant Cost Identification

✓ Opportunity Cost Inclusion

✓ Outsourcing Decisions

✓ Cost Comparisons

✓ Management Recommendations

🎥 Full worked examples are available in the YouTube Learning Library.

📩 Students may submit make-or-buy decision doubts through the Student Doubt Support facility.

Structured Practice

Level 1 – Concept Check

Define:

a) Outsourcing

b) Make or Buy Decision

Level 2 – Application Practice

Explain why opportunity costs should be included in make or buy decisions.

Level 3 – Examination Style Question

1. 1. Cost to Manufacture:
    £45,000
    Opportunity Cost:
    £6,000
    Supplier Price:
    £48,000
    Calculate:
    a) Total Relevant Cost of Making
    b) Recommend whether the business should make or buy.
    (5 marks)
    📌 Additional structured questions are available in the 🎯 Question Papers + YouTube Explanation section.

∗ Additional structured questions are available in the Question Papers and YouTube Explanation section. Students should practise regularly and review video explanations for procedural clarity.

Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.

Proficiency Check

Learn → Practise → Analyse → Evaluate

1. Can you distinguish make and buy alternatives?

2. Can you identify relevant costs accurately?

3. Can you include opportunity costs correctly?

4. Can you compare alternatives logically?

5. Can you justify management recommendations?

6. Can you evaluate financial and non-financial factors?

If unsure, revisit:
• Relevant Costing Principles
• Opportunity Cost Examples
• Make or Buy Decision Rules
• Worked Examples

Detailed Activity Solutions

Solution to Level 3 question

Total Relevant Cost of Making

£45,000 + £6,000

= £51,000

Supplier Price:

£48,000

Decision:

Buy externally

Reason:

Buying saves £3,000 compared with making internally.

How This Topic Appears in the Examination

Common examination tasks include:

✓ Make or Buy Calculations

✓ Relevant Cost Analysis

✓ Opportunity Cost Calculations

✓ Outsourcing Decisions

✓ Qualitative Factor Evaluation

✓ Management Recommendations

Self-Assessment Checklist

□ I understand make or buy decisions

□ I can identify relevant costs accurately

□ I can include opportunity costs correctly

□ I can compare alternatives logically

□ I can evaluate qualitative factors

□ I can answer examination questions confidently

Continue Your Preparation

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PREMIUM RESOURCES

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GUESS PAPERS

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VIDEO ON DEMAND

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