Buy or Make decision

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Whether you need a small or large quantity of product, you have to take one decision out of two options. Either you can buy or you can make the product. Your decision may be perfect if you have deep knowledge of cost accounting because whether you have to buy or make, you have to pay its cost. So, you will take any decision which keep your cost minimum.

With following example, we can tell you which is better buy or make the product?

In above, you are seeing that if company make the product, its per unit cost is Rs. 6 and if company buy same product its cost will be 4. So, from first view, it is good to buy because it is cheap. But before taking the decision, we will go more deep in our analysis.

Now, we have make a comparative make and buy statement

In make decision, we have to pay first variable or marginal cost which is Rs. 150,000 and in buy, decision, we have to pay price outside in the form of cost which will be Rs. 2,00,000 and in both cases, fixed cost is Rs. 1,50,000 whether, we buy or make. So, total cost of make is Rs. 3,00,000 which is less than Rs. 3,50,000 of buying cost. So, making the product decision is better than buying 50,000 units of product.

Important :

a) When you have to take the buy or make decision, compare variable cost of making product with outside total price of buying product. If variable cost is less than outside price, making will be best.

b) If marginal or variable cost of making product is more than outside price of buying product, you have to buy. Buying decision will be best.