Quick Answer: What Is A Make Or Buy Decision?

What is the first step to making a make-or-buy decision?

They proposed a make-or-buy decision process methodology through the following stages: planning, evaluation, internal costs, and performance analysis. Companies can perform their freight distribution in three different ways.

How do you calculate make-or-buy decision?

Analysis for Make or Buy Decision Conversion cost = manufacturing overheads + direct labour read more, cost of fuel and electricity, labor cost, warehousing or storage cost, shipping cost, and the cost of capital. The benefits include higher margins from in-house production.

Why is the make-or-buy decision considered strategic?

The common factors that companies consider in a make versus buy decision include proprietary knowledge, capabilities, quality, capacity, labor, volume, timing, and cost. At the strategic level, the decision to make or buy a component directly impacts organizational profit, and the firm’s reputation in their industry.

Which of the following is an example of sunk cost?

A sunk cost refers to a cost that has already occurred and has no potential for recovery in the future. For example, your rent, marketing campaign expenses or money spent on new equipment can be considered sunk costs. A sunk cost can also be referred to as a past cost.

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What is special order decision?

Special-order decisions involve situations in which management must decide whether to accept unusual customer orders. These orders typically require special processing or involve a request for a low price.

When should a special order be accepted?

A special order generally should be accepted if: A) its revenue exceeds allocated fixed costs, regardless of the variable costs associated with the order.

Why might a company make a product in-house rather than buy it?

There are several reasons to manufacture in-house instead of outsourcing production. It gives your company a lot flexibility to alter the product as you produce it. In-house production ensures higher quality control. With production in-house, you can keep your overhead low by avoiding foreign managers.

What is the break even point formula?

To calculate the break-even point in units use the formula: Break-Even point (units) = Fixed Costs ÷ (Sales price per unit – Variable costs per unit) or in sales dollars using the formula: Break-Even point (sales dollars) = Fixed Costs ÷ Contribution Margin.

What would not be relevant in a make-or-buy decision?

Make-or-buy decisions must be based on the relevant cost of each option. Relevant costs in make-or-buy decisions include all incremental cash flows. Any cost that does not change as a result of the decision should be ignored such as depreciation and indirect fixed costs.

Which items are excluded from cost sheet?

Items Excluded from Cost Accounts

  • Items of Appropriation of Profit. (a) Income tax paid and legal expenses incurred in connection with the assessment of income tax. (b) Transfer to reserves.
  • Items of Pure Finance. (a) Interest and dividends received on investments.
  • Abnormal items. (a) Cost of abnormal idle time.
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What are the factors that influence the make or buy decision?

Factors Influencing Make or Buy Decision:

  • Volume of Production:
  • Cost Analysis:
  • Utilization of Production Capacity:
  • Integration of Production System:
  • Availability of Manpower:
  • Secrecy or Protection of Patent Right:
  • Fixed Cost:
  • Availability of competent suppliers or vendors.

When opportunity costs exist they are always relevant?

When opportunity costs exist, they are always relevant. When capacity is constrained, relevant costs equal incremental costs plus opportunity costs. If the $20,000 spent to purchase inventory could be invested an earn interest of $500, then the opportunity cost of holding inventory is $20,000.

How is the problem of make or buy resolved?

A long term contract with a reliable supplier may solve this problem. (5) Can an alternative use be found for resources made idle by a decision to purchase from outside.

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