In Deciding Whether to Manufacture a Part or Buy It

question 10

Multiple Choice

In deciding whether to manufacture a part or buy it from an outside supplier, which of the following is an irrelevant cost?

• A) Direct labor
• B) Variable overhead
• C) Fixed overhead that will be avoided if the part is purchased from an outside supplier
• D) Fixed overhead that will continue even if the part is purchased from an outside supplier

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Definitions:

Expected Opportunity Loss

The anticipated loss in value for choosing an option that is not the best, quantified as the difference between the best expected outcome and the expected outcome of the chosen option.

Expected Monetary Value

The weighted average of all possible outcomes of a decision, where each outcome is weighted by its probability of occurrence.

Perfect Information

A theoretical situation in which all participants have access to all relevant information to make a decision.

Bayes Law

A principle stating the likelihood of an occurrence, grounded on previously known circumstances that may influence the event.