The make or buy decision involves whether to manufacture a product in-house or to purchase it from a third party . The outcome of this analysis should be a decision that maximizes the long-term financial outcome for a company.
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).
When to use make and buy decision making How do you compute?
Compare the relevant cost of in-house production with the cost of acquiring product or service externally. If the internal cost exceeds the external price , it is better to buy. If the internal cost exceeds the external price, it is better to buy. If the external price exceeds the internal cost, it is better to make.
What do u mean by 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 . Make-or-buy decisions, like outsourcing decisions, speak to a comparison of the costs and advantages of producing in-house versus buying it elsewhere.
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.
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?
At the operational level, the decision to make or buy a component directly impacts operational efficiency, income, and expenses. ... A strategic make or buy decision will utilize the variables affected at the strategic level and operational level which will lead to a long term sustainable competitive advantage.
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.
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 asset’s cash flows if the asset is purchased . ... 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 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.
Which cost is taken into consideration for make or buy decision?
The cost to buy an item should include -purchase price of the item or component, transportation cost, sales tax and octopi , procurement cost, carrying cost, receiving and incoming inspection costs. The analysis of these two costs helps take decision whether to make or buy.
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.
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 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.
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 .
