Buy vs Make decision

Industry 195 views 11 replies

yasaswi gomes

My grammar is 💯 good I

7296 Points Joined March 2019

We all know that goods and service providers either manufacture or distribute products to consumers acting like an agent/broker.

We also know, Break-even Analysis tells us for how many units will the firm breaks even i.e., no profit or loss.

Let us assume the cost of buying is

P x Q

Let us assume the cost of making is

(VQ)+F

Here,

P= Price per unit

Q= Quantity in units

V= Variable cost per unit

F= Fixed costs

How we weigh Buy vs Make

PQ=(VQ)+F

Cancelling Q/Q = 1 from both sides, and sorting for Q later on

P= V + F

P - V = F

P - V / F = 1 (=Q)

So,

Q = F / P - V

and this is same as Break-Even point in Units.

Conclusion:

If the annual demand is less than Q, it is cheaper to buy from external vendors.

If the annual demand is more than Q, it is cheaper to manufacture inhouse.

Replies (11)

CA Raj Doshi

Practising CA

8944 Points Joined December 2013

PQ=(VQ)+F
Cancelling Q/Q = 1 from both sides, and sorting for Q later on

I don't think this is possible.
PQ / Q = VQ/Q + (F/Q)
P = V + (F/Q)

I COULD BE WRONG also. Not sure.

1.
when we MAKE the contribution MUST be greater than fixed cost and profit.
2.when we buy the cost of purchase must be lesser than revenue derived from selling the product.
3. variable cost incurred on making the product must be lesser than purchasing cost.

HERE IN SYMBOLIC TERMS:
1.VQ MUST BE LESSER THAN PQ
THEN WE MAKE.
2. VQ GREATER THAN PQ THEN WE BUY AND PQ MUST BE LESSER THAN revenue or price.

yasaswi gomes

My grammar is 💯 good I

7296 Points Joined March 2019

@ Raj C Doshi thank you for giving your opinion.

If a = 1-r and b = 2r+1 then for what value of r, a is equal to b?

1- r = 2r + 1
Cancelling out 1 on both sides, we get, -r = 2r
i.e., 2r+r = 0
3r= 0
r = 0

So, I had an idea of something like this and followed this way from simplifications.

yasaswi gomes

My grammar is 💯 good I

7296 Points Joined March 2019

@ Sabyasachi thank you for giving your opinion. Your expounding the truth

Q = F / P - V

P	150
F	30
Q	100
V	1
Single unit selling price @ 50 margin	1.5	Decrease selling price to 1.1	Decrease selling price to .90
Normal Q	60	300	-300
VQ	100
PQ	150

New Demand	120	120	120
VQ	120	120	120
PQ	180	132	108
Q	60	300	-300

New Demand	70	70	70
VQ	70	70	70
PQ	105	77	63
Q	60	300	-300

This also can be one KPI.

yasaswi gomes

My grammar is 💯 good I

7296 Points Joined March 2019

Now we can prove that both the philosophies are real. I have taken something below breakeven of 60 units. When I took 70 units for this year, the break even is negative due to price. Hence it is price sensitive. Please advise further

Q = F / P - V

P	150
F	30
Q	100
V	1
Single unit selling price @ 50 margin	1.5	Decrease selling price to 1.1		Decrease selling price to .90
Normal Q	60	300		-300
VQ	100
PQ	150

New Demand	70	120		70
VQ	70	70		70
PQ	105	77		63
Q	60Make	300	Buy	-300Buy

New Demand	50	70		50
VQ	50	50		50
PQ	75	55		45
Q	60	Buy 300	Buy	-300Buy

yasaswi gomes

My grammar is 💯 good I

7296 Points Joined March 2019

This matrix must be easy to understand that it is Price sensitive.

	BEP=60 Units @ 1.50
	70 Units @ 1.5	70 Units @ 1.1	70 Units @ .90
	105	77	63
	70	70	70
	35	7	-7
Profit	5	-23	-37
	50 Units @ 1.5	50 Units @ 1.1	50 Units @ .90
	75	55	45
	50	50	50
	25	5	-5
Profit	-5	-25	-35

CA. Sourav Sarkar

Chartered Accountant

24588 Points Joined November 2019

Thanks for the information

Yasaswi Gomes new

Finance

4545 Points Joined September 2020

Tomorrow I will try this pq/q

Yasaswi Gomes new

Finance

4545 Points Joined September 2020

Q=f/p-v. Is the answer when I used simplification calculator. Somehow I have to prove this MBA formula is not working out

Yasaswi Gomes new

Finance

4545 Points Joined September 2020

Alright! If

EBIT= PQ-VQ-F=0

Is the breakeven. Then I have to try it to find out. But definitely my assumptions are not wrong because its price sensitive. Fifo method is there where the price moments cannot be forecasted. Let's see how it goes.

Yasaswi Gomes new

Finance

4545 Points Joined September 2020

EBIT=PQ-VQ-F

Q= f/P-v

Q > bep (q) MAKE satisfied because EBIT is more than bep EBIT.

Q< BEP (Q) BUY is satisfied because EBIT is less than bep EBIT.

But as per Sabyasachi

His criteria failed as per the screenshot attached.

Contribution is same for.make and buy

VQ must be greater than pq or vice versa, we can buy or sell. I was distracted that day. It's the quantity which matters. So I'm deleting one of my private bolgs related this https://yasaswigomes.blogspot.com