Final answer:
Managers use cost-benefit analysis to determine if it's cheaper to buy products from a vendor or make them in-house by weighing marginal costs against marginal benefits and considering economies of scale.
Step-by-step explanation:
When managers evaluate whether it is more cost-effective to purchase products from a vendor or to manufacture them internally, they are performing a cost-benefit analysis. This analysis involves comparing the additional costs of producing one more unit, known as marginal costs, to the additional benefits received from producing that unit, referred to as marginal benefits. By creating a T-chart where costs are listed on one side and the benefits on the other, managers can assess what they will have to give up, such as money and effort, and what they stand to gain, like time and experience, from deciding between in-house production or external procurement. Additionally, they may consider economies of scale, which describe how the cost per unit decreases as production volume increases. A larger production scale can often lead to lower average costs, thus influencing the decision in favor of in-house production if the company is capable of producing at such scale efficiently.