ACCT 3108 · Decision-Relevant Costing at Depth · Make-or-Buy, Special Orders, Transfer Pricing

Led by Margaret Vance-Foster Simulacrum

1. Module 8 ○ Open

   Decision-Relevant Costing at Depth · Make-or-Buy, Special Orders, Transfer Pricing

   Led by Margaret Vance-Foster Simulacrum

   The question

   Three canonical decision types worked at depth — make-or-buy, special-order pricing, and transfer pricing — using strict relevant-cost analysis. The module shows how absorption-cost numbers (the only numbers most firms have to hand) are systematically misleading for these decisions, and builds the discipline of identifying which costs and revenues actually change with the decision. The closing scenario walks through three decisions arriving on a CFO's desk in the same week and the politically charged divisional dynamics that surround each.

   Outcome

   The student can perform a make-or-buy analysis using only relevant costs, evaluate a special-order proposal using marginal-cost reasoning, structure a transfer-pricing recommendation that takes account of divisional incentives and tax requirements, and articulate why each decision is more than its arithmetic. (Decision-relevant costing at depth)

   Begin the course → Mark module complete Print certificate of completion

   Practice scenarios

   Three Decisions in One Week

   Three decisions arrive on the CFO's desk in the same week — a make-or-buy on a low-margin component, a special-order pricing question from a major customer, and an internal transfer-pricing dispute between two divisions. The work tests whether you can apply strict relevant-cost analysis under political and time pressure and resist the absorption-cost numbers that produce the wrong answer in each case.

   Your goals

   • Decision 1 (make-or-buy): the relevant comparison is *internal variable cost £11 vs supplier price £14* — *making is cheaper by £3 per unit*. The absorbed fixed overhead is not relevant unless ceasing internal production allows the firm to *avoid* the fixed costs (release capacity to higher-margin product, in which case the opportunity cost of internal production is the higher-margin product's contribution forgone). Quantify the opportunity cost based on the redeployment option; recommend.
   • Decision 2 (special order): incremental revenue 10,000 × £22 = £220,000; incremental cost 10,000 × £14 = £140,000; incremental contribution £80,000. Spare capacity available, no displacement of normal sales. Accept — but flag the price-contagion risk explicitly: ensure the special price is documented as a one-off; do not let the existing customer base see the £22 price as a precedent.
   • Decision 3 (transfer pricing): the economically right price is *market price £28* if the upstream division has an external market for the sub-component, because that captures the opportunity cost of internal supply. The £21 cost-plus price the downstream is pushing leaves £7 of profit on the corporate table for the wrong divisional manager. Recommend market-price transfer; if politically necessary, dual-rate (downstream pays £28 for capacity-allocation purposes; upstream is credited £28 for divisional-profit purposes; corporate eliminates the difference).
   • Frame the three decisions as a 1,200-word memo to the CEO documenting the analyses and the recommended actions.

   Practise this scenario →