Buy vs Make decision

yasaswi gomes (My grammar is 💯 good I)   (7290 Points)

01 November 2021  

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.