Specific decisions

In this lesson

1. 0:00 Section three: Specific decisions and relevant costing
2. 0:44 Make or buy decisions: Key considerations
3. 2:01 Yoko case study: Make or buy scenario
4. 3:36 Identifying relevant costs in the decision
5. 5:32 Calculating incremental profit impact

About this lesson

You'll discover why comparing costs alone isn't enough: you need to identify incremental cash flows, consider capacity constraints, and evaluate the impact on production volume. Through a worked example, you'll see how buying in components can free up machine capacity to increase output and profit, even when the purchase price appears higher per unit. This video walks you through the complete decision-making framework. You'll learn to distinguish between relevant and irrelevant costs (fixed costs that won't change aren't relevant), calculate the financial impact of the make-or-buy choice, and account for changes in production volume when capacity is the limiting factor. The lesson emphasises that make-or-buy decisions involve multiple considerations beyond cost—quality, control, and resource optimisation all matter—but the quantitative analysis using relevant costing provides the foundation for your recommendation. By the end, you'll be confident tackling make-or-buy questions in your exam. You'll know how to structure your answer, identify which costs to include, and explain why the decision makes financial sense. This is essential knowledge for PM and APM papers, where examiners expect you to think beyond surface-level cost comparisons and demonstrate understanding of how decisions affect overall business profitability.

Duration: 7m