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To Make or to Buy a Product?

Company x that sells home interior problems is considering adding a new product to their catalog. One of the co-founders of the company has gathered the following data regarding adding hand painted mirrors to the collection for sale to their upscale customers. He needs to determine whether to make-or-buy the product. Producing them within the company would require an investment of $5,000 in new equipment, plus $16 per each piece made. The company has the option of purchasing the product from a vendor at $20 each. He believes that, with aggressive marketing, they can sell 3,000 mirrors.

a. Use spreadsheets to display and analyze Steve's two options. Which should he choose?
b. He is also aware, from past experience, that marketing estimates are just that ...estimates. Determine a break-even point for the production and sales volume below which the buy option is better and above which the make option is better.

Solution Preview

See the attachment.

Steve saves $4 by producing inhouse. In other words, the option of procuring from the vendor costs him $4 more than producing inhouse after spending $5000 as capital costs. This means that till 1250 units (arrived by ...

Solution Summary

The solution evaluates to make versus buy decision. Includes an Excel document.