Make or Buy Decision Analysis

This assignment delves into the crucial decision businesses face: manufacturing products internally or purchasing them from suppliers. It examines the cost structure of production, including direct materials, labor, variable overhead, and fixed overhead, using the example of Play Dough Company's potential coffee cup manufacturing. Furthermore, it analyzes the profitability implications of both options and explores key factors influencing make-or-buy decisions such as production volume, capacity utilization, vendor reliability, and strategic considerations.

Running Head: Management Accounting
1
Project Report: Management Accounting

Management Accounting
2
Que e)
If Play Dough Company would manufacture the coffee cups than the following cost
could be occurred:
Direct Material
$
0.60
Direct labour
$
0.20
Variable overhead
$
0.10
Fixed overhead
$
0.15
Further, the sales price and the units of the coffee cups are given below:
Sales units 400000
Selling Price
$
1.20
Through the given information, it has been found that is the company would
manufacture the coffee cups than the following cost would be occurred:
Per
unit Total
Purchase price
Direct Material
$
0.60
$
2,40,000.00
Direct Labour
$
0.20
$
80,000.00
Variable OH
$
0.10
$
40,000.00
relevant Fixed OH
$
0.15
$
60,000.00
Total Relevant cost 1.05
$
4,20,000.00
Further, it has been found that if the company would manufacture than the following
profit would be earned by the company:
Calculation of Total profit
Per unit Total

Management Accounting
3
Total Revenue $ 1.20
$
4,80,000.00
Total cost $ 1.05
$
4,20,000.00
Profit $ 0.15
$
60,000.00
Whereas if the company would be bought canisters from the canister company than
the total profit of the company would be $ 53200 and if the canisters would be manufactured
by the company than the total profit of the company would be less. At the same time, in
above case the profit of the company would be $60000. So company must go for the new
proposal as this would offer the highest profit to the company.
Que f)
Manufacture the product or buy the product from suppliers is a huge decision. This
decision is affected through many factors such as capacity of the plant, economical condition,
production, demand and supply of the product etc. these factors affect the decision of the
buying or manufacturing decision of the company. Some of the factors are below which
affects the make or buy decision of a company:
 Volume of production
 Utilization of production capacity
 Availability of manpower
 Integration of production capacity
 Quality and reliability of vendors
 Protection of patent right
 Technological aspects
 Strategic aspects etc.