Comprehensive Example and Key Takeaways

Putting It All Together

Suppose manufacturing a component internally costs $18 per unit in relevant costs, while an outside supplier offers it for $20 per unit. If outsourcing frees capacity that can generate an additional $4 per unit in contribution margin, the effective outsourcing cost becomes lower after considering the opportunity benefit, making outsourcing the better decision.

• Ignore sunk costs.
• Include opportunity costs whenever resources have alternative uses.
• Compare only relevant future costs and revenues.
• Consider qualitative factors before making the final decision.
• Support decisions with differential analysis.

The best managerial decision is based on relevant information, not historical costs.