MAKE-OR-BUY

DECISION
A MAKE-OR-BUY DECISION IS AN ACT OF CHOOSING BETWEEN
MANUFACTURING A PRODUCT IN-HOUSE OR PURCHASING IT
FROM AN EXTERNAL SUPPLIER.

COMPANIES USE QUANTITATIVE ANALYSIS TO DETERMINE WHETHER

MAKING OR BUYING IS THE MOST COST-EFFICIENT OR NOT.
MAKE OR BUY ANALYSIS
 FACTORS AFFECTING THE MAKE OR BUY
DECISION

1. Costing Factors
COST: THE COST INCURRED IN PURCHASING OR MANUFACTURING THE PRODUCT
IS THE FIRST AND ESSENTIAL FACTOR IN THE DECISION PROCESS.

PURCHASE PRICE: IT SPECIFICALLY REFERS TO THE PRICE PAID BY THE FIRM TO

PURCHASE THE PRODUCT OR COMPONENT. IT PLAYS A SIGNIFICANT ROLE IN THE
DECISION PROCESS AS IT IS ONE OF THE BASES FOR COMPARISON.

STORAGE COST: IT REFERS TO THE COST INCURRED ON STORING THE PURCHASED

PRODUCTS OR COMPONENTS.
 Non-costing Factors

1 EXPERTISE:
Bef ore manuf a c turi n g p rod uct s i n t ern a l l y, f i rms
mus t c he c k t he s ki l l s and e xperti s e requi red f or
p r o ducti on

2 TAXATION:
I t i s al so an es s en ti a l f a ct or i n t h e d eci s i on -ma king
p r o cess. Thi s i s bec a us e t h e r a t e of t axat i o n v ar i e s
acr oss produ c ts a n d reg i on s

3 CURRENT CAPACITY:
Ano ther vi tal f a c tor i s th e f i rm’ s exi s t i n g
cap aci ty. The ma n uf a c tu rer mus t a n a l yz e
whe ther the ex i s ti n g c a pa ci t y s at i s fi e s the
demand or n ot.
 CVP ANALYSIS

Cos t- vol ume- p rof i t ( C VP ) a n a l ys i s h el ps i n t a k i ng d ecisio n it

compares the p ri c e deman d ed b y t h e s uppl i ers (i. e. o u r b u ying
cos t) wi th th e v a ri a bl e cos t of prod uci n g t h a t co m p o nent.

Fi x e d c os t s a r e not t a k e n i nt o c ons i de r a t i on o n t h e
a s s umpt i on t ha t t he y a r e a l r e a dy i nc ur r e d .
EXAMPLE :-