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CSS Financial and Cost Accounting P-1 QUESTION #1207
Question 1
A manufacturing company is considering whether to produce in-house or outsource production. Relevant costs for this decision include:
  • Fixed costs of the company.
  • Historical costs of production.
  • Direct variable costs and outsourcing costs.✔️
  • Total costs incurred in the prior year.
Correct Answer Explanation
In a make-or-buy (outsourcing) decision, only relevant (incremental/differential) costs matter. These include direct variable costs of in-house production and the cost of outsourcing. Fixed costs that remain unchanged regardless of the decision are irrelevant. Historical (sunk) costs are also irrelevant as they cannot be changed.