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Make-or-Buy Decision Analysis Guide

The document discusses factors to consider in a make-or-buy decision for a company. It outlines elements of analyzing the costs of making a part internally, such as direct labor costs and overhead, and costs of buying externally, such as purchase price and transportation. It provides an example where a company considers buying a part from a supplier for Rs. 70 per unit, but making it internally would cost Rs. 90 per unit after accounting for fixed overhead not changing with an external buy. Therefore, the company should not accept the supplier's offer based on this cost analysis. The document also lists operational considerations that may favor making a part internally over outsourcing.

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21 views9 pages

Make-or-Buy Decision Analysis Guide

The document discusses factors to consider in a make-or-buy decision for a company. It outlines elements of analyzing the costs of making a part internally, such as direct labor costs and overhead, and costs of buying externally, such as purchase price and transportation. It provides an example where a company considers buying a part from a supplier for Rs. 70 per unit, but making it internally would cost Rs. 90 per unit after accounting for fixed overhead not changing with an external buy. Therefore, the company should not accept the supplier's offer based on this cost analysis. The document also lists operational considerations that may favor making a part internally over outsourcing.

Uploaded by

click2nishu
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

PRESENTATION ON

MAKE AND BUY


DECISION

Presented by
Vishal Raj
2k10mkt45
INTRODUCTION
The make-or-buy decision is the act making a strategic choice
between producing an item internally (in-house) or buying it
externally (from an outside supplier).

 The buy side of the decision also is referred to as


outsourcing. Make-or-buy decisions usually arise when a firm
that has developed a product or part—or significantly modified
a product or part—is having trouble with current suppliers, or
has diminishing capacity or changing demand.

The two most important factors to consider in a make-or-buy


decision are cost and the availability of production capacity.
ELEMENTS OF THE "MAKE"
ANALYSIS INCLUDE:

 Incremental inventory-carrying costs


 Direct labour costs
 Incremental factory overhead costs
 Delivered purchased material costs
 Incremental managerial costs
 Any follow-on costs stemming from quality
and related problems
 Incremental purchasing costs
 Incremental capital costs
COST CONSIDERATIONS FOR
THE "BUY" ANALYSIS INCLUDE
 Purchase price of the part
 Transportation costs
 Receiving and inspection costs
 Incremental purchasing costs
 Any follow-on costs related to quality or
service
EXAMPLE
MA Company is thinking of buying a part that is
currently used in one of its products from outside.
The unit cost to make this part is:

Rs /unit
Direct materials 27
Direct labor 15
Variable overhead 3

Depreciation of special equip. 9


Supervisor’s salary 6
General factory overhead 30
Total cost per unit 90
 General factory overhead is allocated on the
basis of direct labor hours and is not going to
change if the parts are bought from outside.
 The 90 Rs. Unit cost is based on 20,000 parts
produced each year.
 An outside supplier has offered to provide the
20,000 parts at a cost of 70 Rs. Per part.
 Should we accept the supplier’s offer?
 In case of purchase
Total cost= 20000* 70= 1400000.
 In case of making the part
Total cost= 20000*(90-30-6)= 1080000.
 So the producer should not accept the
suppliers offer.
MAKE-OR-BUY DECISIONS ALSO
OCCUR AT THE OPERATIONAL LEVEL.
 These considerations that favour making a part in house:

 Desire to integrate plant operations


 Productive use of excess plant capacity to help absorb fixed
overhead
 Need to exert direct control over production and/or quality
 Better quality control
 Design secrecy is required to protect proprietary technology
 Unreliable suppliers
 No competent suppliers
 Desire to maintain a stable workforce (in periods of
declining sales)
 Control of lead time, transportation, and warehousing .
THANK YOU

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