Cost Accounting
Make or buy a component
A supplier charges ₹84. Your factory reports a ₹90 unit cost. Is outsourcing cheaper?
Compare costs that change with the decision. Allocated overhead can remain even if production stops.
Advantage of buying = avoidable production cost + opportunity benefit − purchase cost
₹77 × 10,000 avoided + ₹120,000 contribution − ₹84 × 10,000 paid = ₹50,000.
Buying changes cost by ₹84 − ₹77 = ₹7 per part, or ₹70,000 more overall. Keep making under these assumptions.
₹77 × 10,000 avoided + ₹120,000 contribution − ₹84 × 10,000 paid = ₹50,000.
If the freed line earns ₹120,000 of contribution, what is the net advantage of buying?