Question

Identify some important qualitative considerations in an evaluating a decision to make or buy a part.

In a decision to sell or to process further of what relevance are costs incurred prior to the decision point? Explain your answer.

Answer 1

The quantitative factors should be considered first then the qualitative factors for decision making on buy or make a part. Some of the qualitative factors are below:

For making decision:

Experience of the production department to manufacture the requirement

The raw materials required can be sourced or not to make it

For buying decision:

Suppliers availability and trustworthiness

The laws in the country for importing it etc

2) Relevant costs and benefits:

Incremental costs of further processing

Incremental revenues from further processing

Irrelevant costs:

Common costs

Sunk costs

The decision rule to be made is below:

Process further If the incremental revenues are higher than incremental costs of further processing

Sell at split off point If the incremental revenues are lower than incremental costs of further processing