A make-or-buy decision is an act of choosing between manufacturing a product in-house or purchasing it from an external supplier .
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).
What are the disadvantages of make-or-buy decision?
Level of costs . Too little space to expand company activity . Unstable demand and sales fluctuations . Disappointing cooperation with suppliers .
What is a make-or-buy decision example?
| Per Unit Total | Direct Labor 8 48,000 | Applied Variable Factory Overhead 9 54,000 | Applied Fixed Factory Overhead 12 72,000 | $1.5 per direct labor dollar |
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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.
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.
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 the criteria for buy decision?
- Finished product can be made cheaply by the firm than that by the outside suppliers.
- Finished product only is manufactured by limited number of outside firms, which are unable to meet the demand.
- The part has an importance for the firm, and requires extremely close quality control.
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 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.
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 the make-or-buy analysis?
What Is a Make-or-Buy Decision? ... Also referred to as an outsourcing decision, a make-or-buy decision compares the costs and benefits associated with producing a necessary good or service internally to the costs and benefits involved in hiring an outside supplier for the resources in question.
What are the benefits of planned purchasing decisions?
Such a process can yield enormous benefits for buyers, including reduced inventory levels, faster time to market, significant cost savings, and reduced development costs .
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 are the advantages of buyer decision process?
A benefit of using the Consumer decision process is it gives marketers an understanding of what happens after the purchase of a product . This is useful for marketers as it helps them realize that for consumers to purchase an item again, the consumer needs to be satisfied in the consumption and post evaluation phase.
