Make or buy decision
Whether a part is made or bought depends on comparing costs. At the indifference quantity both cost the same.
Formulas
- Indifference quantity = extra fixed costs / (purchase price − variable cost)
- Above it, making is cheaper; below it, buying
- Only include relevant (extra) fixed costs
Your turn
Three problems on this topic. Amounts with or without thousands separators, a point for pence.
Task
A component can be bought for £73.00 each. Making it adds fixed costs of £30,500.00 a year and variable costs of £42.50 per unit. 2,500 units are needed.
Break-even (indifference) quantity in units
Cost of making at the required quantity in £
Decision
Amounts like 12,500 or 12500.50; percentages as a number (12.5). Round to the penny or 2 decimal places.
Worked example
A component can be bought for £62.00 each. Making it adds fixed costs of £201,450.00 a year and variable costs of £36.50 per unit. 6,450 units are needed.
Worked solution
- 1.Indifference point: fixed / (price − variable) = £201,450.00 / (£62.00 − £36.50) = 7,900 units
- 2.Make: £201,450.00 + £36.50 × 6,450 = £436,875.00; buy: £62.00 × 6,450 = £399,900.00
- 3.Below the indifference point, buy is cheaper.
Typical mistake: Including fixed costs that continue anyway; only the extra fixed costs count.
Frequently asked questions
Which fixed costs count?
Only those caused by making the part; costs that arise either way do not change the decision.