Capital Budgeting Analysis: Make vs. Buy Decision for Hampton Co.

This report provides a comprehensive analysis of a make or buy decision for Hampton Company, focusing on whether to manufacture cans internally or purchase them from an external supplier. The analysis considers the costs associated with both options, including the purchase of new machinery, hiring new labor, and raw material expenses for in-house production, versus the direct purchase cost from a supplier. By evaluating the financial implications of each choice, including a comparison of total costs, the report recommends that Hampton Company manufacture the cans themselves. This recommendation is based on the finding that in-house production would result in lower costs and potentially enhance the company's net present value (NPV) and internal rate of return (IRR), ultimately offering a higher rate of return on the project. The report emphasizes the importance of considering both financial and non-financial factors in the decision-making process to optimize the company's financial performance.

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Project report: Management Accounting

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Contents
Introduction.......................................................................................................................3
Analysis............................................................................................................................3
Recommendation and Conclusion....................................................................................4
References.........................................................................................................................4

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Introduction:
In this case, make or purchase analysis has been done. In the given case, management
of the company is confused to take a decision about making the product or purchase it from
other supplier. For analyzing this case, capital budgeting analysis has been done and a better
recommendation has been given to the management and the organization.
Analysis:
According to the case, if the product would be made by the company itself than
company would be required to buy new machineries, hire new labour and set up a plant
whereas in case of purchase, company is only required to find a suitable supplier and bought
products from that supplier (Ansari, 2004). Through analyzing the cost of both the cases,
following evaluation has been done:
Make Purchase
Need of 5.5 million cans per year $16,50,000
Wages 1,80,000
Health benefits 12,000
Other benefits 27,000
Total wages and benefits 2,19,000
5,50,000
$24,19,000
$27,50,000
(Bromwich & Bhimani, 2005)
According to this case, it has been found that if the products would be manufactured
by the company than the company would have to bear $24,19,000 whereas if the company
would directly buy the products from the market than company have to pay $27,50,000 to the
suppliers (Hoque, 2012). Through the analysis, it has been found that 55,00,000 units are
required by the company to be manufactured. If the company opt the make decision than
company just have to bear the $24,19,000 and the other operations are also handled by the
company accordingly whereas if company opt the decision of not making the products itself

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and buying it from market than the expenditure of the comapny would be higher (Garrison,
Noreen, Brewer & McGowan, 2010).
Further, it has been analyzed than make or buy decision must be taken by the
company after considering financial as well as non financial information of the company. If
the company make the units itself than any sudden changes could be done by the company
whereas if the products are purchased by the company from the supplier than with the
changes in the technology, products could also be changed (Elton, Gruber, Brown &
Goetzmann, 2009).
Recommendation and Conclusion:
From the above analysis, it has been found that it becomes easy for a company to
evaluate the market condition and make a better decision about buying the product or
manufacturing it from the market through analyzing the financial figures of the company.
Further, it has also been analyzed that the decision making process is crucial for the
organization.
Through the above analysis over financial and non financial information, it has been
found that the company must manufacture the products rather than buying it from another
supplier as it would offer higher return to the company as well as the NPV and IRR ratio of
the company would also be competitive. Further, the rate of return of the company and
particular project would also enhance.

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References:
Ansari S. (2004). Management Accounting: A Strategic Focus. Houghton Mifflin College
Devision.
Bromwich, M. & Bhimani, A., (2005). Management accounting: Pathways to progress. Cima
publishing.
Elton, E.J., Gruber, M.J., Brown, S.J., & Goetzmann, W.N. (2009). Modern Portfolio Theory
and Investment Analysis. John Wiley & Sons.
Garrison, R. H., Noreen, E. W., Brewer, P. C., & McGowan, A. (2010). Managerial
accounting. Issues in Accounting Education, 25(4), 792-793.
Hoque, Z., (2012). Strategic management accounting. Spiro Press.