Page 231 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes 5 .Incremental managerial costs

6. Any follow-on costs stemming from quality and related problems
7. Incremental purchasing costs
8. Incremental capital costs

Consideration of Cost for “Buy” Analysis

Cost considerations for the “buy” analysis include:

1. Purchase price of the part
2. Transportation costs
3. Receiving and inspection costs

4. Incremental purchasing costs
5. Any follow-on costs related to quality or service

Notes One will note that six of the costs to consider are incremental. By defi nition,
incremental costs would not be incurred if the part were purchased from an outside source.

If a firm does not currently have the capacity to make the part, incremental costs will include
variable costs plus the full portion of fi xed overhead allocable to the part’s manufacture.
If the fi rm has excess capacity that can be used to produce the part in question, only the
variable overhead caused by production of the parts are considered incremental. That is,

fixed costs, under conditions of sufficient idle capacity, are not incremental and should not

be considered as part of the cost to make the part.

Classification in Make-or-buy
Make-or-buy investigations are triggered by a firm’s desire to improve the efficiency of the

supply chain and to offer better products and services to its customers. Make-or-buy decision
can be strategic or tactical and may involve parts, capital items, services of every type and a wide
range of items supporting industrial operations (e.g., castings, tools, spare parts, etc.)
Products and services in make-or-buy investigations have widely differing attributes and,
depending on how they are used by enterprises, involve a multitude of complexities that make

it difficult to derive workable and simple typologies of make-or-buy decisions. In contrast, by
considering the circumstances that trigger a make-or-buy investigation, a simple and easily
conceivable typology can be derived. All make-or-buy decisions fall into one of three categories
defined as follows:

(i) M-items: The items/services made by the enterprise prior to the resolution of the make-or
buy issue.

(ii) B-items: The items/services purchased from external suppliers prior to the resolution of
the make-or-buy issue.
(iii) N-items: The items/services used for the first time by the enterprise.

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