AMP 415 Module 6 DQ 1
The two most important factors to consider in a make-or-buy decision are cost and the availability of production capacity.
While cost is seldom the only criterion used in a make-or-buy decision, simple break-even analysis can be an effective way to quickly surmise the cost implications within a decision. Suppose that a firm can purchase equipment for in-house use for $250,000 and produce the needed parts for $10 each. Alternatively, a supplier could produce and ship the part for $15 each. Ignoring the cost of negotiating a contract with the supplier, the simple break-even point could easily be computed:
$250,000 + $10Q = $15Q
$250,000 = $15Q − $10Q
$250,000 = $5Q
50,000 = Q
Therefore, it would be more cost effective for a firm to buy the part if demand is less than 50,000 units, and make the part if demand exceeds 50,000 units. However, if the firm had enough idle capacity to produce the parts, the fixed cost of $250,000 would not be incurred (meaning it is not an incremental cost), making the prospect of making the part too cost efficient to ignore.
Resources: http://www.referenceforbusiness.com/management/Log-Mar/Make-or-Buy-Decisions.html#ixzz3aVt4RvEK
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