A make-or-buy decision is an act of choosing between manufacturing a product in-house or purchasing it from an external supplier . Make-or-buy decisions, like outsourcing decisions, speak to a comparison of the costs and advantages of producing in-house versus buying it elsewhere.
When to use make-or-buy decision?
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. Make-or-buy analysis is conducted at the strategic and operational level.
What is a make-or-buy decision quizlet?
Make vs. Buy Decision. the act of deciding whether to produce an item internally or buy the item from an outside supplier . make . Producing (i.e., manufacturing) materials or products internally (i.e., in operations owned by the company).
Why is the make-or-buy decision considered strategic?
The common factors that companies consider in a make versus buy decision include proprietary knowledge, capabilities, quality, capacity, labor, volume, timing, and cost. ... At the strategic level, the decision to make or buy a component directly impacts organizational profit, and the firm’s reputation in their industry .
What is an example of a make-or-buy decision?
Examples of the qualitative factors in make-or-buy decision are: control over quality of the component, reliability of suppliers, impact of the decision on suppliers and customers , etc. ... The quantitative factors are actually the incremental costs resulting from making or buying the component.
What kind of costs are irrelevant when making decisions?
Irrelevant costs are those that will not change in the future when you make one decision versus another. Examples of irrelevant costs are sunk costs , committed costs, or overheads as these cannot be avoided.
How do you make a decision to buy something?
- Step 1: Outline your goal and outcome. ...
- Step 2: Gather data. ...
- Step 3: Develop alternatives. ...
- Step 4: List pros and cons. ...
- Step 5: Make the decision. ...
- Step 6: Take action. ...
- Step 7: Reflect on the decision.
What are the limitations of make-or-buy decision?
- Not satisfying quality of the goods.
- Level of costs.
- Too little space to expand company activity.
- Unstable demand and sales fluctuations.
- Disappointing cooperation with suppliers.
- Widening the range of products offered.
How you can evaluate a lease or buy decision?
The evaluation procedure for a lease-buy decision can be summarized as follows: ... Compute the net present value of the cash flows generated for the firm by the asset if it is leased . Compare the NPV (buying option) with the NPV (leasing option). The option with the higher NPV is superior and the other should be rejected.
What are pricing decisions?
Pricing decisions are the choices businesses make when setting prices for their products or services . ... Companies that make simple pricing decisions often try to increase sales by making small, competitive adjustments such as purchase discounts, volume discounts and purchase allowances.
What costs are relevant in retain or replace equipment decisions?
Joint product costs are relevant for any sell-or-process further decisions. Any trade-in allowance or cash disposal value of the old asset is relevant in a retain or replace equipment decision.
What are the relevant costs in a make-or-buy decision?
Relevant costs in make-or-buy decisions include all incremental cash flows . Any cost that does not change as a result of the decision should be ignored such as depreciation and indirect fixed costs.
When considering a keep or drop decision it is important to consider?
An important consideration in a keep-or-drop decision is the impact on the costs and revenues of other segments . Managers must prioritize how products are produced when faced with a(n) _____ resource. Make-or-buy decisions are also referred to as ______ decisions.
Which cost is associated with buy decision?
The buy decision is associated with only variable cost . Expressing all factors in to money terms carries out a thorough and comparative analysis. Then the decision is to be taken based on which one is more economical, to make or to buy. 2.
Why might a company make a product in-house rather than buy it?
There are several reasons to manufacture in-house instead of outsourcing production. It gives your company a lot flexibility to alter the product as you produce it . In-house production ensures higher quality control. With production in-house, you can keep your overhead low by avoiding foreign managers.
What are the major trade offs in a make-or-buy decision?
Dabhilkar (2011) points out that there are trade-offs in ‘make or buy’ decision-making regarding their main reasons ( costs, quality, core activity focus, flexibility, and innovation ) that often conflict and imply that a company cannot have all these reasons when outsourcing an activity.
