What is a make or buy decision and how is it analyzed?

What is a make or buy decision and how is it analyzed?

• A. A decision to price products according to competitor prices.
• B. A decision on producing goods internally or purchasing externally; analyzed via relevant costs and savings, considering capacity, quality, and strategic factors.
• C. A plan to implement new IT systems with vendor support only.
• D. A decision to allocate production capacity to the highest-margin product only.

Answer: (B)

The key idea here is deciding whether to produce a good in-house or buy it from an outside supplier. A make-or-buy analysis weighs the costs and benefits of each path, focusing on what changes when you choose one option over the other. You look at relevant, incremental costs and any potential savings, such as the cost to manufacture (materials, direct labor, variable overhead) versus the purchase price, and what costs you’d avoid if you outsource (maintenance, depreciation, facility overhead). Capacity matters: if you have idle capacity, making might be attractive because you can spread fixed costs over more units, but if capacity is tight, outsourcing may be necessary or more economical. Quality, lead times, and the reliability of suppliers are important, since outsourcing introduces dependency on external performance. Strategic factors also come into play—whether production is a core competency, the impact on long-term control, intellectual property, and risk management. Other options don’t fit because pricing against competitors is about market pricing, not whether to produce or buy. Planning for IT systems with vendor support focuses on outsourcing a service area, not manufacturing decisions. Allocating capacity to the highest-margin product deals with resource allocation or product mix, not the choice between making and buying.

The key idea here is deciding whether to produce a good in-house or buy it from an outside supplier. A make-or-buy analysis weighs the costs and benefits of each path, focusing on what changes when you choose one option over the other. You look at relevant, incremental costs and any potential savings, such as the cost to manufacture (materials, direct labor, variable overhead) versus the purchase price, and what costs you’d avoid if you outsource (maintenance, depreciation, facility overhead).

Capacity matters: if you have idle capacity, making might be attractive because you can spread fixed costs over more units, but if capacity is tight, outsourcing may be necessary or more economical. Quality, lead times, and the reliability of suppliers are important, since outsourcing introduces dependency on external performance. Strategic factors also come into play—whether production is a core competency, the impact on long-term control, intellectual property, and risk management.

Other options don’t fit because pricing against competitors is about market pricing, not whether to produce or buy. Planning for IT systems with vendor support focuses on outsourcing a service area, not manufacturing decisions. Allocating capacity to the highest-margin product deals with resource allocation or product mix, not the choice between making and buying.