Make Versus Buy Case

1. Following is the best possible solution in the make versus buy case. Let us determine the
manufacturing cost first.
Manufacturing Cost:
YEAR 1 2 3 4 5 TOTAL
Qty Per Year 300,000 500,000 700,000 900,000 1,000,000 3,400,000
Material Cost/ Unit 14 15.4 16.94 18.634 20.4974 --
Labor Cost/ Unit 4 3.6 3.6 3.96 4.356 --
Indirect Labor Cost/ 2 1.8 1.8 1.98 2.178 --
Unit
Power & Fuel Cost/ 2 2.2 2.42 2.662 2.9282 --
Unit
Variable Cost/ Unit 22 23 24.76 27.236 29.9596 --
Total Variable Cost/ 6,600,000 11,500,000 17,332,000 24,512,40 29,959,600 89,904,000
Year 0
Supervisor Salary/ 60,000 66,000 72,600 79,860 87,846 366,306
Year
Machine Cost/ Year 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 5,000,000
Total Cost/ Year 7,660,000 12,566,000 18,404,600 25,592,26 31,047,446 95,270,306
0

Procurement Cost:
YEAR 1 2 3 4 5 TOTAL
Quantity/ Year 300,000 500,000 700,000 900,000 1,000,000 3,400,000
Material Cost/ Year 20 20 22 24.2 26.62 --
Transport Cost 2 2.2 2.4 2.6 2.8 --
Inventory Cost 1 1 1.1 1.21 1.331 --
Variable Cost/ Unit 23 23.2 25.5 28.01 30.751 --
Total Cost/ Year 6,900,000 11,600,000 17,850,000 25,209,00 30,751,000 92,310,000
0

Total Difference = Manufacturing Cost – Procurement Cost

= 95,270,306 - 92,310,000
= 2,960,306

From the calculated figures, we can clearly see the difference between the either possibilities.
Manufacturing the house won’t be a good idea as compared to the cost of acquisition of the
house.

2. If we compare the either possibilities in the given scenario, manufacturing the house
encompasses several risks. For example, what if the forecasted valuation varies? There are
chances that the cost may increase due to several reasons. Hence, it will increase the overall cost
of the manufacturing. If we relate the same with the procurement. It offers a fix cost which is
contrasting the other option. Even if both the option has similar expense even then procurement
would still be a better option. Apart from the calculations, there are several other factors which
may affect the decision making. Every aspect of the following needs to be gaged to come the
final decision. Few of them are discussed below:
1. The Factor of Economics (Be it Micro or Macro)
2. Variation of Capacity
3. Professionalism of the Vendors
4. Any Associated Risk (Relevant)
5. Total Investment
6. Uncertainties Affect
7. Technical Expenses
8. Time Duration or ETD (Expected Time of Delivery/Completion)
9. Urgencies Associated in any form
10. Accounting Errors Risk from the Vendors/ Embezzlement