Examples of Make or buy Decision

Make or Buy Decision

	Product A	Product B
Sale price	100	120
Variable Cost	80	100
Incremental Fixed cost	8000	5000
Unit to produced	5000 unit	5000 units
Supplier offer	90	90

Suggest company should buy or make the products.

Solution

1. Cost can be saved on making product

	Product A	Product B
Variable Cost of making	80	100
units	5000	5000
Variable cost saved	40,000	50,000
Incremental fixed cost	8,000	5,000
	48,000	55,000

2. Cost will be required to buy

	Product A	Product B
Variable Cost of making	90	100
units	5000	5000
Variable cost of buying	45,000	45,000

3. Differential Cost

	Product A	Product B
Cost of making Saved	(48,000)	(55,000)
Cost of buying	45000	45000
Variable cost of buying	(3,000)	(10,000)

Both products should be sub contracted because the cost offered by the supplier is less than cost saved by not making the product.

 If cost of supplier would be more than cost saved by not making the product then it would be a making case.