Make or Buy Decisions Report

This report provides a detailed analysis of make-or-buy decisions for the Play Dough Company. It compares the cost of manufacturing canisters in-house versus purchasing them from external suppliers. The analysis includes a breakdown of direct materials, direct labor, variable overhead, and fixed costs. The report also considers the impact of accepting a special order for coffee cups and the implications of purchasing canisters from an external supplier while manufacturing coffee cups. Furthermore, it discusses non-cost factors such as manpower requirements, infrastructural facilities, process restrictions, technological changes, and the quality of goods supplied by external suppliers. The conclusion emphasizes the importance of considering both cost and non-cost factors when making make-or-buy decisions and suggests that the company should use advanced cost identification methods for a more accurate assessment.

RUNNING HEAD: MAKE OR BUY DECISIONS
MAKE OR BUY
PROBLEM ANALYSIS

1
MAKE OR BUY DECISIONS
Introduction
Make and buy decision is the one of the most crucial decisions a firm has to make in order to
meet the demands of the market. The managers of the company have to make a decision as to
whether to manufacture some products in house or to purchase them from the outside parties.
This decision about manufacturing or buying a product requires a significant amount of
information about the cost involved in the manufacturing and the purchasing of the product.
Not only cost but the other relevant factors are also to be considered while taking buy and
make decisions. The cost of making and buying the materials is identified using different
techniques of cost management. Following is the analysis of the both the options available
with the Play Dough Company.
Solution:
(a) Cost Per Unit Under Traditional Method :
Statement of Producing 760000 Canisters
Particulars Amount
Direct Materials 3,00,000.00
Direct Labour (Working Note 1) 1,80,000.00
Variable Overhead (Working Note 2) 1,20,000.00
Total Variable Cost 6,00,000.00
Fixed Cost 5,40,000.00
Total Product Cost
11,40,000.0
0

2
MAKE OR BUY DECISIONS
Statement of Producing One Canister
Particulars Amount
Total Product Cost
11,40,000.0
0
Total No. Of Products 7,60,000.00
Cost per Product 1.50

3
MAKE OR BUY DECISIONS
(b) Statement of comparison between Purchase Cost & Manufacturing Cost
Of Canisters
Statement of Contribution if Canisters are Purchased from Outside
Particulars Amount
Sales Value for 760000 Canisters
16,72,000.0
0
16,72,000.0
0
Purchase Cost Per Product 1.00
Total No. Of Products 7,60,000.00
Cost per Product 7,60,000.00
Contribution 9,12,000.00
Statement of Production Cost Of Canister
Particulars Amount
Sales Value for 760000 Canisters
16,72,000.0
0
16,72,000.0
0
Direct Materials 3,00,000.00
Direct Labour (Working Note 1) 1,80,000.00
Variable Overhead (Working Note 2)

4
MAKE OR BUY DECISIONS
1,20,000.00
Total Variable Cost(b) 6,00,000.00
Avoidable Fixed Cost :-
Supervisory Salary 80,000.00
Depreciation on Machine 28,000.00
Total Avoidable Fixed Cost (c) 1,08,000.00
Total Effective Product Cost (d) (b)+(c) 7,08,000.00
Contribution (a)-(d) 9,64,000.00
Therefore it is advisable for the Playdough Company to manufacture the
product and not to purchase the product from outside suppliers.
(c) Statement of Decision of Acceptance of Offer
Particulars Amount
Sales Price Per Product (a) 1.40
Variable Cost Per Product (b) 0.79
Contribution (a-b) 0.61
Since the company has capacity based on pure financial grounds, it can easily
increase the capacity as per the needs of offer. It must also be noted that fixed

5
MAKE OR BUY DECISIONS
cost is irrelevant for the decision of whether to accept the offer or not (Heitger,
Hansen & Mowen, 2008). Fixed Cost would be incurred irrespective of fact
whether or not the offer is accepted or not.
(d) The other factors should the firm consider before deciding whether to
accept the order in part (c) :
(i) Whether the product or production makes a contribution as can be derived
from the above illustration i.e. 0.61 per product.
(ii) In the selection of alternatives, additional fixed costs should be considered
but due to lack of information it can be assumed that no additional fixed cost is
incurred for the acceptance of offer (Zimmerman & Yahya-Zadeh, 2011).
(iii) The continuity of regular external demand and its impact on selling price
are also to be considered i.e. if there could be any impact on the selling price of
its regular product.
(iv) Non-cost factors such as the need to keep labour force intact and
governmental attitude also to be taken into account.
(e) Statement of whether to purchase the canisters from the Canister
company and start manufacturing coffee cups or continue manufacturing
canisters:
Statement of contribution from manufacturing coffee cups:
Particulars Amount
Sales Value (400000*1.2) 480000
Less :
Direct Material (400000*0.6) 240000
Direct Labour (400000*0.2) 80000
Variable Overhead (400000*0.1) 40000

6
MAKE OR BUY DECISIONS
Contribution 120000
Less :
Fixed Overhead (400000*0.15) 63000
Profit (a) 57000
Statement of contribution from purchasing Canisters from the Canister
Company :-
Particulars Amount
Sales Value (760000*2.2) 1672000
Less :
Purchase Cost(760000*1) 760000
Contribution 912000
Less :
Fixed Overhead : 540000
Less : Avoidable Fixed Costs 108000 432000
Profit (b) 480000
Total Profit (a)+(b) 537000
Statement of Production Cost Of Canister
Particulars Amount
Sales Value for 760000 Canisters
16,72,000.0
0
16,72,000.0
0
Direct Materials 3,00,000.00
Direct Labour 1,80,000.00
Variable Overhead

7
MAKE OR BUY DECISIONS
1,20,000.00
Total Variable Cost(b) 6,00,000.00
Fixed Cost 5,40,000.00
Total Fixed Cost (c) 5,40,000.00
Total Effective Product Cost (d) (b)+(c)
11,40,000.0
0
Contribution (a)-(d) 5,32,000.00
Therefore it is advisable for the Playdough Company to manufacture the
Coffee Cups and purchase the canisters from Outside suppliers as there is an
extra profit of 11000 from choosing the above alternative.
(f)
The other factors which should be considered in deciding whether to
manufacture the canisters or purchase them from the outside supplier :-
Return on Investment
(i) Whether or not the return on the necessary investment to be made to
manufacture is attractive enough (Drury, C.M., 2013).
Manpower requirement:
(ii) Whether the company have the requisite skilled manpower to make the
product.
Infrastructural facilities
(iii) If the transport and other infrastructure facilities are adequately available
for taking the decision on purchasing the product.
Process Restriction
(iv) If the process of making is confidential or patented.
Technological Changes
(v) If there is risk of technological obsolescence for the component such that it

8
MAKE OR BUY DECISIONS
does not encourage capital investment in the component.
Other factors
(vi) Non-cost factors such as the quality of goods supplied by outside supplier
or reasonable certainty from the side of supplier about meeting the delivery
dates. Also to ensure that more than one supplier of product or component is
available to reduce the risk of outside buying.
Conclusion
It can be concluded from the above analysis that the company should deploy advanced
methods rather than adopting a traditional approach of cost identification of the products it is
dealing in. As the traditional approach of cost identification does not provide accurate picture
of all the overheads involved in the manufacturing process. Moreover, while making Make or
Buy decisions the company must consider the other relevant factors of the production.

9
MAKE OR BUY DECISIONS
References:
DRURY, C.M., 2013. Management and cost accounting. Ed. 7th, Pat Bond, Cengage
Learning.
Heitger, D., Hansen, D. & Mowen, M., 2008. Fundamental cornerstones of managerial
accounting. Thomson Learnig, USA.
Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and
control. Issues in Accounting Education, 26(1), pp.258-259.