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Assignment Question:

Scenario: Company XYZ is faced with a decision on whether to make or buy a component for its final product. As a managerial accounting expert, explain how to approach this decision and calculate the relevant costs involved.

? Analyzing the Decision:

Making or buying a component is a crucial decision that hinges on various factors. Here's a step-by-step guide to tackle this managerial accounting dilemma:

1. Identify Relevant Costs:

• Direct Costs: Include raw materials, direct labor, and any other costs directly tied to production.
• Indirect Costs: Consider overhead costs associated with production.

2. Opportunity Costs:

• Analyze the potential income or benefits foregone by choosing one alternative over another.

3. External Costs:

• Assess any costs associated with purchasing the component externally, such as shipping or supplier fees.

4. Compare Total Costs:

• Sum up all relevant costs for both options to determine the most cost-effective solution.

5. Decision Time:

• If the total cost of making is lower than buying, it's a green light for in-house production.

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