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Many times firms engaged in manufacturing operations are confronted with a buy or make decision. Such a decision revolves around whether to manufacture each input required for the finished product, they produce or to buy them from the market. A number of factors, such as input costs and sales volumes influence this decision.
Analysis of the cost workings of the Ski Corporation reveals that buying the bindings will result in an increase in the variable costs per pair of skis, of 50 cents than the costs of producing the bindings, within the factory. Therefore, the decision is to make the bindings in-house.
When a sales volume of 10,000 units per year is considered, Ski Corporation may produce its own bindings, as own manufacture will result in break-even sales. On the other hand, buying the bindings will lead to a loss of $5,000 to the company.
Considering a sales volume at 12,500 units per year, Ski Corporation may buy the bindings instead of manufacturing them in-house. This is because making the additional volume of bindings will need new investment from Ski Corporation to purchase new equipment. Therefore, it will make sense for Ski Corporation to buy the bindings incurring the increased variable costs.
In this case, the company can avoid the additional investment of $10,000 in fixed costs, which is required to manufacture the bindings in-house. Buying bindings at a sales volume of 12,500 units will make the company earn a profit of $18,750, whereas producing them in house will result in a profit of only $15,000, which is lower by $ 3,750.
When the company hits a sales volume of 30,000 units, it is advisable for Ski Corporation to invest the additional $10,000 for manufacturing the bindings in- house. With a high sales volume of 30,000 units, it is prudent to make the additional investment, as the 50 cents of savings per pair of skis will make good the additional investment cost.
At a sales volume of 30,000 units, Ski Corporation will be able to make a profit of $190,000 by making its own bindings, as against $185,000 if the corporation purchases the bindings. In addition, the additional facility created will lead to more profits, when the company increases its sales volume above 30,000 units.
When the company decides to manufacture the inputs at its own facilities in-house or to procure them in the market from different vendors, the company has to consider a number of qualitative factors, which have an impact on such a decision.
When the company decides to produce in-house, there can be better quality control of the inputs, and the company can avoid the risk of delays in deliveries. On the other hand, by procuring the inputs from a vendor in the market, the company is at an advantageous position with respect to the flexibility of production quantities.
Moreover, the company can focus on the manufacture of its core products. However, there is the potential risk of lower quality and delayed deliveries, which depends largely on the reliability of the supplier. Finally, the firm must consider costs as well as other pros and cons, while deciding to make or buy manufacturing inputs for completion of its products.
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