Answer:
To analyze the decision of whether to make a component in-house or outsource it, we can break down the relevant costs, apply relevant cost concepts, and consider non-financial factors. Here’s a structured approach to the question:
a. Identify the relevant costs in the decision to make or buy.
Relevant costs are those costs that will be directly affected by the decision at hand. In the make-or-buy decision, the following costs should be considered:
- Direct Materials Costs: The cost of raw materials needed to produce the component in-house.
- Direct Labor Costs: Wages and benefits for employees directly involved in manufacturing the component.
- Variable Overhead Costs: Costs that vary with production levels, such as utilities and maintenance.
- Fixed Costs: Any fixed costs that can be avoided if the component is outsourced (e.g., depreciation on equipment that would not be used).
- Opportunity Costs: The potential benefits lost from using resources for in-house production instead of other profitable activities.
- Outsourcing Costs: The price charged by the supplier to provide the component, including shipping and handling.
b. Apply relevant cost concepts to analyze the cost-effectiveness of making or outsourcing the component.
To analyze the cost-effectiveness, we can compare the total relevant costs of making the component in-house versus outsourcing it:
-
Calculate Total Relevant Costs for Making In-House:
- Sum the direct materials, direct labor, variable overhead, and any avoidable fixed costs.
- Include opportunity costs if applicable.
-
Calculate Total Relevant Costs for Outsourcing:
- Sum the total cost charged by the supplier, including any additional costs related to outsourcing (e.g., shipping).
-
Comparison:
- Compare the total relevant costs of making versus buying. The option with the lower total relevant cost is the more cost-effective choice.
c. Discuss non-financial factors that should also be considered in this decision.
In addition to financial considerations, several non-financial factors should be evaluated:
- Quality Control: The ability to maintain quality standards may be better in-house, especially if the component is critical to the final product.
- Lead Time: Consideration of how quickly the component can be produced in-house versus the time it takes to receive it from an external supplier.
- Flexibility: In-house production may allow for more flexibility in adjusting production levels or making design changes.
- Supplier Reliability: The reliability and reputation of the supplier can impact the decision. A reliable supplier may reduce risks associated with outsourcing.
- Strategic Considerations: The decision may align with the company’s long-term strategy, such as maintaining core competencies or building relationships with suppliers.
- Employee Impact: Consideration of how the decision will affect employees, including potential layoffs or changes in job roles.
d. All of the above.
In conclusion, the decision to make or buy a component should be based on a comprehensive analysis of relevant costs, a comparison of the cost-effectiveness of each option, and an evaluation of non-financial factors that could impact the overall success of the decision. Therefore, the best answer is d. All of the above.