Make or buy indifference point
Making adds fixed costs but lowers variable costs; above the indifference quantity it pays off.
Worked example
A component can be bought for £31.00 each. Making it adds fixed costs of £56,800.00 a year and variable costs of £23.00 per unit. 6,000 units are needed.
Worked solution
- 1.Indifference point: fixed / (price − variable) = £56,800.00 / (£31.00 − £23.00) = 7,100 units
- 2.Make: £56,800.00 + £23.00 × 6,000 = £194,800.00; buy: £31.00 × 6,000 = £186,000.00
- 3.Below the indifference point, buy is cheaper.
Typical mistake: Including fixed costs that continue anyway; only the extra fixed costs count.
Your turn
Three problems of exactly this type, each time with new numbers. Amounts with or without thousands separators.
Task
A component can be bought for £54.00 each. Making it adds fixed costs of £188,800.00 a year and variable costs of £22.00 per unit. 7,000 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.
Formulas for this topic
- Indifference quantity = extra fixed costs / (purchase price − variable cost)
- Above it, making is cheaper; below it, buying
- Only include relevant (extra) fixed costs
Typical mistake: Including fixed costs that continue anyway; only the extra fixed costs count.
Frequently asked questions
What is the typical mistake in "Make or buy indifference point"?
Including fixed costs that continue anyway; only the extra fixed costs count.
Which fixed costs count?
Only those caused by making the part; costs that arise either way do not change the decision.