Make or Buy Decisions Mastery Problem: Cost-Based Decision Making s subtracted Managers must often decide between two or more altematves, Diferentlal analyals is used In decislon making. When using difrerentlal analysls, it ls Important to only Include those amounts tnat are ditferent between the alternatves, Difterentlal cost l from differential revenue to determine differentlal Income/loss. Differential Analysis: Make or Buy For example, manufacturing compan es o en assamble companents In a a lished product. Thase companents can be purchased ram a supplar or produced with n me company. The decislon to produca th compor ant ar buy t ls tan re erred to as mke-or- buy decisian and usas dfarantlal analysls to assist In the decislon-making pracess Differentiel e nalysis is anly one step in decld ng to meke or buy the Product Management must also teke into consideration nonquantitative date. fthe company has been making the Product, wil it ey employees if t sterts buying the product? f so will this hurt the company's reputation? If parts required for making the components will be obtained fron an outside source, is thst source reliable? These nanquantitative issues will influence the success or failure of a make-or-buy decision When calculating differentlal cost, the only costs that should be Included are: urchased from a su the produ nfluence outside the companents APPLY THE CONCEPTS: Calculating per-unit manufacturing cost in a make-or-buy decision Pandar Corporation, a high-end digital camera manufacturer, currenty purchases a component part from an outside company at a price of s269 per unit, While the quality of the component has always been very high, Pandar Corporation's management belleves t might be possible to produce a superior component internally at a cost lower than s269. The accounting department has provided an estimate of the per-unit manufacturing cost of the component. Direct materials Diract labor variaba factory overhaad Fixed fectory averhead 157 $401 The compan 's control ar ballavas that the estimata may b ncorrect bacause F2 ndar Corporation has excass manufacturing capacity to Produce the components without incurring additional fixed actor overhaad. wnat per unit manufacturing cost should be used n determining whether Pandar Carporat an snauld purchase the componnts fram n outside company or manufacture them Intamally7 APPLY THE CONCEPTS: Calculating differential income in a make-or-buy decision Complete the table belo to compare the per-unit cost ror Pandar Corporation to make the component and the per-unit cost to buy e component. Make or Buy Decisions Purchas price ofn instrument penel 269 Differentiel cost to manufecture Direct materials Diract labor varlable factory owerhead 157 Cotsvings from manufacturing an instrument panel Based on your analyas, It s better for Pandar Corporation to the component. Dolng sosave the company per unit
