Make Or Buy Decision Questions And Answers Pdf

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Manufacturing businesses have to consider cost-lowering decisions on a daily basis. This article will take you through all the basic things you need to know with respect to the vital cost-saving decision known as make-or-buy. The make-or-buy decision is the action of deciding between manufacturing an item internally or in-house or buying it from an external supplier also known as outsourcing.

Make-or-Buy Decisions

Question: With the differential analysis format in hand, we can now go back to Best Boards, Inc. What information should Amy provide that will help management make this decision? Answer: Table 7. This is called a make-or-buy decision because the company must decide whether to make the product internally or buy the product from an outside firm often called outsourcing.

Question: What information did Amy find to help Best Boards with the decision whether to make their own wakeboards or buy them from an outside supplier?

Answer: After further research, Amy identified the following product costs associated with wakeboard production at Best Boards:. However, Amy must identify which of the costs listed previously are differential costs if the company acquires the wakeboards from an outside producer. That is, Amy must determine which costs will change and which will remain the same. Question: Amy must now prepare a differential analysis to determine which alternative is best for the company.

Her analysis appears in Figure 7. Because the focus of make-or-buy decisions is on product costs, and because sales revenue is not differential to this decision, it is not necessary to include sales revenue in the analysis. This in turn eliminates the need to show the contribution margin or net income.

Even if sales revenue were included, the outcome would remain the same. Figure 7. Answer: Realizing that the information shown in Figure 7. Refer to Figure 7. Question: The Differential Amount column presented in Figure 7.

How can we present this information in a more concise format? Answer: We show a more concise presentation in Figure 7. Look closely at Figure 7. As you compare these two figures, notice that only differential costs are presented in Figure 7. That is, costs that do not differ from one alternative to another are excluded from the summary differential analysis since this information is irrelevant to the decision. The amounts in parentheses in Figure 7.

Note: Amounts shown in parentheses indicate a negative impact on profit, and amounts without parentheses indicate a positive impact on profit. The analysis shown in Figure 7. After all, the goal of differential analysis is to analyze the costs that differ from one alternative to the next. We often use the term avoidable cost to describe a cost that can be avoided, or eliminated, if one alternative is chosen over another. If Best Boards chooses to buy the product from an outside producer, the company avoids such costs as direct materials, direct labor, manufacturing overhead, and the salary of one supervisor.

In this context, avoidable cost is the same as differential cost. Source: Photo courtesy of C. Trucks hauled truckloads of these panels—each truckload averaging 10 tons—2, miles from Mexico City to Salt Lake City.

In all, four million pounds of concrete were shipped. The manager in charge of the library construction had tried to obtain the concrete panels from sources in the United States.

Quality Bikes, Inc. Quality Bikes incurs the following annual production costs to produce 2, racing bikes internally:. Factory building and equipment lease costs will remain the same regardless of the decision to outsource or to produce internally. Skip to main content. Module 7: Managerial Decisions. Search for:. Table 7. Determining Differential Product Costs Question: What information did Amy find to help Best Boards with the decision whether to make their own wakeboards or buy them from an outside supplier?

Bob: Hi, Amy, what have you got for us? Amy: As you can see from my analysis, outsourcing the production of our wakeboards does not reduce overall production costs. Jim: How can that be? Amy: Exactly! Although we eliminate all variable product costs such as direct materials and direct labor by outsourcing production, several fixed product costs remain. None of these costs can be eliminated if we outsource production.

Bob: Perhaps we should consider outsourcing in a few years as these long-term commitments expire. Business in Action 7.

Key Takeaway Differential analysis requires the identification of all revenues and costs that differ from one alternative to another. In general, managers select the alternative with the highest profit. If the only differences between the alternatives are with costs as in the make-or-buy decision for Best Boards , decision makers would select the alternative with the lowest cost.

Review Problem 7. Licenses and Attributions. CC licensed content, Shared previously. As you can see from my analysis, outsourcing the production of our wakeboards does not reduce overall production costs. How can that be? Perhaps we should consider outsourcing in a few years as these long-term commitments expire.

Make-or-Buy Decision

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PDF | Purpose: The aim of this study is to analyse factors that are related to buy decision-making which can be used as a help to evaluate outsourcing Then, the next question is that "is there one appropriate solution to.


Final report: Make or buy

Sometimes businesses encounter a situation where they have to decide between making a particular product themselves or to buy it from an outside supplier. The decision is based on both financial and non-financial factors. In general proposed purchased price is compared with the marginal cost of production. If marginal cost of the production are more than the price offered by the outside supplier then clearly buying goods in finished form is a better option.

Learn insourcing versus outsourcing, make versus buy decisions, concept of relevance test prep for online business administration degree.

Relevant costs

If an organization is already manufacturing the entire product internally without involving any outside contractor, why should it outsource any of its business processes? Organizations need to weigh the short-term financial impact of outsourcing against the long term consequences. Any cost that does not change as a result of the decision should be ignored such as depreciation and indirect fixed costs. Once we sort out the relevant costs in the make-or-buy decision, we need to find which option minimizes the total cost. The approach to finding the optimum solution in an outsourcing problem depends on the number of limiting factors. Compare the relevant cost of in-house production with the cost of acquiring product or service externally.

This chapter will focus on a number of short-term decisions that are typically made by a business:. Each of these decisions is based on relevant costing principles. Therefore, a recap of relevant costing will be useful before looking ateach of the decisions in turn. Decision making involves making a choice between two or morealternatives. Alldecisions will be made using relevant costs and revenues.

A matter is relevant if there is a change in cash flow that is caused by the decision. Banks record cash so this test is reliable. Sunk, or past, costs are monies already spent or money that is already contracted to be spent. A decision on whether or not a new endeavour is started will have no effect on this cash flow, so sunk costs cannot be relevant. Committed costs are costs that would be incurred in the future but they cannot be avoided because the company has already committed to them through another decision which has been made. For example, if a company has two year lease for piece of machinery, that cost will not be relevant to a decision on whether to use that machinery on a new project which will last for the next month. Note that additional fixed costs caused by a decision are relevant.

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Question: With the differential analysis format in hand, we can now go back to Best Boards, Inc. What information should Amy provide that will help management make this decision? Answer: Table 7. This is called a make-or-buy decision because the company must decide whether to make the product internally or buy the product from an outside firm often called outsourcing. Question: What information did Amy find to help Best Boards with the decision whether to make their own wakeboards or buy them from an outside supplier? Answer: After further research, Amy identified the following product costs associated with wakeboard production at Best Boards:. However, Amy must identify which of the costs listed previously are differential costs if the company acquires the wakeboards from an outside producer.

Are you outsourcing enough? This was one of the main questions asked by management consultants during the outsourcing boom. Outsourcing was viewed as one of the best ways of getting things done for a fraction of the original cost. Outsourcing is closely related to make or buy decision. The corporations made decisions on what to make internally and what to buy from outside in order to maximize the profit margins. As a result of this, the organizational functions were divided into segments and some of those functions were outsourced to expert companies, who can do the same job for much less cost. Make or buy decision is always a valid concept in business.

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A make-or-buy decision is an act of choosing between manufacturing a product in-house or purchasing it from an external supplier. 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. Regarding in-house production, a business must include expenses related to the purchase and maintenance of any production equipment and the cost of production materials. Costs to make the product can include the additional labor required to produce the items, which takes the form of wages and benefits, storage requirements within the facility, holding costs overall, and the proper disposal of any remnants or byproducts from the production process. It also includes signing any contracts with suppliers that might require the company to be locked-in to certain deals for a certain period of time.

These days companies manufacture a lot of product varieties. Each product requires multiple parts to be created. Manufacturers can produce such parts themselves or they can buy them.

Make-or-Buy decision also called the outsourcing decision is a judgment made by management whether to make a component internally or buy it from the market. While making the decision, both qualitative and quantitate factors must be considered. 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. For example: incremental production cost per unit, purchase cost per unit, production capacity available to manufacture the component, etc.

 - Он привлек внимание к тексту на экране.

Как это странно, подумал Стратмор, что насчет вируса Чатрукьян был прав с самого начала. Его падение пронзило Стратмора холодным ужасом - отчаянный крик и потом тишина. Но более страшным стало то, что он увидел в следующее мгновение. Скрытые тенью, на него смотрели глаза Грега Хейла, глаза, полные ужаса.

 Мисс Флетчер. У нас вирус. Я уверен. Вы должны… Сьюзан вырвала руку и посмотрела на него с возмущением. - Мне кажется, коммандер приказал вам уйти.

Ненавидел американскую еду, американские нравы, но более всего ему было ненавистно то, что американцы железной хваткой держали мировой рынок компьютерных программ.

Беккер кивнул. - Ты же сказала, что не колешься. Девушка засмеялась: - Это же чудо-маркер.

Он отличался громким голосом и безвкусно-крикливой манерой одеваться. Коллеги-криптографы прозвали его Галит - таково научное название каменной соли. Хейл же был уверен, что галит - некий драгоценный камень, поэтому считал, что это прозвище вполне соответствует его выдающимся умственным способностям и прекрасному телосложению.

5 Response
  1. Gretel R.

    Cardo wants to develop a model for make-or-buy decisions. Therefore In each phase, the different methods to be able answer the questions.

  2. Glycaftkonan1980

    (b) What would be the decision if the supplier offered the tables at $12 each? Solution: Calculation of per table marginal cost of production. make-or-buy-​decisions-.

  3. Cordlendsembra

    Question: With the differential analysis format in hand, we can now go back to Best Answer: Table “Make-or-Buy Decision” presents the costs that the vice​.

  4. FilemГіn M.

    A complete or accept decision can be made using quantitative or qualitative research and most of the time, the results of quantitative analysis cost-benefit analysis are enough to decide on whether to make the product in-house or buy outsource from outside suppliers.

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