What is a ‘Make-Or-Buy Decision’
A make-or-buy decision is the act of choosing between manufacturing a product in-house or purchasing it from an external supplier. In a make-or-buy decision, the most important factors to consider are part of quantitative analysis, such as the associated costs of production and whether the business has the capacity to produce at required levels.
Explaining ‘Make-Or-Buy Decision’
Also referred to as the outsourcing decision, the 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. To compare costs accurately, all aspects regarding the acquisition and storage of the items must be considered.
In regards to in-house production, a business must include expenses related to the purchase and maintenance of any production equipment as well as the cost of production materials. Further costs can include the additional labor required to produce the items, storage requirements within the facility or if additional storage space must be purchased, and the proper disposal of any remnants or byproducts from the production process.
Costs relating to purchasing the products from an outside source must include the price of the good itself, any shipping or importing fees, and applicable sales tax charges. Additionally, the expenses relating to the storage of the incoming product and labor costs associated with receiving the products into inventory must be factored into the decision.
The results of the quantitative analysis may be sufficient to make a determination based on the approach that is more cost-effective. At times, qualitative analysis addresses any concerns that cannot be measured specifically.
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