Make or Buy

1. STRATEGIC COST MANAGEMENT
Dr. Mustafa K
Visiting Faculty
School of Management Studies,
DCMS, University of Calicut
mustafapsmo@gmail.com
M B A THIRD SEMESTER
Marginal Costing AS A TOOL FOR
DECISION MAKING

2. MARGINAL COST
“Marginal cost is the additional cost of
producing an additional unit of
product.”

3. Example
•A company manufactures 100 units of a product
per month. The total fixed cost per month is
Rs.5000 and marginal cost per unit is Rs.250.
Additional cost=250 is the Marginal Cost
Ex-1 (100 units)
Variable cost 25,000
Fixed Cost 5,000
Total Cost 30,000
Ex-2 (101 units)
Variable cost 25,250
Fixed Cost 5,000
Total Cost 30,250

4. MARGINAL COSTING
“In Marginal costing technique,
only variable costs are charged
as product costs and included
in inventory valuation.

5. PERFORMA OF MARGINAL
COSTING
Particulars A B C Total
Sales x x x x
Less VC x x x x
Contribution -- -- -- --
Fixed Cost x x x x
Profit x x x x

6. MARGINAL COSTING HELPS
IN DECISION MAKING
• Fixation of Selling Price.
• Exploring New markets.
• Make or buy decisions.
• Product mix
• Operate plant or shut down.

7. EXAMPLE
(Make or buy)

8. • If the cost of making radio is Rs.6.25
each while cost of buying is Rs.5.75
each.
a) Should you make or buy?
b) What would be your decision, if the
supplier offered the component at
Rs.4.85 each?
Per unit Cost Rupees
Materials 2.75
Labour 1.75
Other Variables 0.5
Fixed Cost 1.25

9. EXAMPLE
(Product Mix)

10. a) 2,000 units of product A and C.
b) 4,000 units of product B.
c) 1,000 units of product A, 2,000
units of product B, 1,600 units of
product C.
Q:-)Which is the best Product mix?
a) SP of A, B,C are 36,40,100.
b) Variable Overheads of A,B,C are
Rs.2,Rs.4,Rs.8. Fixed cost is 20,000
Cost per unit A B C
Direct Material 20 16 40
Direct Wages 8 10 20